The Quarterly
WFC 2017 10-K

Wells Fargo & Company (WFC) SEC Quarterly Report (10-Q) for Q1 2018

WFC Q2 2018 10-Q
WFC 2017 10-K WFC Q2 2018 10-Q



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

Commission file number 001-2979

WELLS FARGO & COMPANY

(Exact name of registrant as specified in its charter)

Delaware

No. 41-0449260

(State of incorporation)

(I.R.S. Employer Identification No.)

420 Montgomery Street, San Francisco, California 94163

(Address of principal executive offices)  (Zip Code)

Registrant's telephone number, including area code:  1-866-249-3302 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑

No o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑

No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer     ☑

Accelerated filer  o

Non-accelerated filer     o (Do not check if a smaller reporting company)

Smaller reporting company  o

Emerging growth company  o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No ☑

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Shares Outstanding

April 25, 2018

Common stock, $1-2/3 par value

4,872,873,834




FORM 10-Q

CROSS-REFERENCE INDEX

PART I

Financial Information

Item 1.

Financial Statements

Page

Consolidated Statement of Income

63

Consolidated Statement of Comprehensive Income

64

Consolidated Balance Sheet

65

Consolidated Statement of Changes in Equity

66

Consolidated Statement of Cash Flows

68

Notes to Financial Statements

1


-

Summary of Significant Accounting Policies  

69

2


-

Business Combinations

72

3


-

Cash, Loan and Dividend Restrictions

73

4


-

Trading Activities

74

5


-

Available-for-Sale and Held-to-Maturity Debt Securities

76

6


-

Loans and Allowance for Credit Losses

83

7


-

Equity Securities

99

8


-

Other Assets

101

9


-

Securitizations and Variable Interest Entities

102

10


-

Mortgage Banking Activities

109

11


-

Intangible Assets

112

12


-

Guarantees, Pledged Assets and Collateral, and Other Commitments

114

13


-

Legal Actions

118

14


-

Derivatives

122

15


-

Fair Values of Assets and Liabilities

131

16


-

Preferred Stock

148

17


-

Revenue from Contracts with Customers

151

18


-

Employee Benefits

154

19


-

Earnings Per Common Share

155

20


-

Other Comprehensive Income

156

21


-

Operating Segments

158

22


-

Regulatory and Agency Capital Requirements

159

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Financial Review)

Summary Financial Data  

2

Overview

3

Earnings Performance

6

Balance Sheet Analysis

19

Off-Balance Sheet Arrangements  

22

Risk Management

23

Capital Management

49

Regulatory Matters

56

Critical Accounting Policies  

57

Current Accounting Developments

58

Forward-Looking Statements  

59

Risk Factors 

61

Glossary of Acronyms

160

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

62

PART II

Other Information

Item 1.

Legal Proceedings

161

Item 1A.

Risk Factors

161

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

161

Item 6.

Exhibits

162

Signature

163


1



PART I - FINANCIAL INFORMATION


FINANCIAL REVIEW

Summary Financial Data

% Change

Quarter ended

Mar 31, 2018 from

($ in millions, except per share amounts)

Mar 31,
2018


Dec 31,
2017


Mar 31,
2017


Dec 31,
2017


Mar 31,
2017


For the Period

Wells Fargo net income

$

5,136


6,151


5,634


(17

)%

(9

)

Wells Fargo net income applicable to common stock

4,733


5,740


5,233


(18

)

(10

)

Diluted earnings per common share

0.96


1.16


1.03


(17

)

(7

)

Profitability ratios (annualized):

Wells Fargo net income to average assets (ROA)

1.09

%

1.26


1.18


(13

)

(8

)

Wells Fargo net income applicable to common stock to average Wells Fargo common stockholders' equity (ROE)

10.58


12.47


11.96


(15

)

(12

)

Return on average tangible common equity (ROTCE) (1)

12.62


14.85


14.35


(15

)

(12

)

Efficiency ratio (2)

68.6


76.2


62.0


(10

)

11


Total revenue

$

21,934


22,050


22,255


(1

)

(1

)

Pre-tax pre-provision profit (PTPP) (3)

6,892


5,250


8,463


31


(19

)

Dividends declared per common share

0.39


0.39


0.38


-


3


Average common shares outstanding

4,885.7


4,912.5


5,008.6


(1

)

(2

)

Diluted average common shares outstanding

4,930.7


4,963.1


5,070.4


(1

)

(3

)

Average loans

$

951,024


951,822


963,645


-


(1

)

Average assets

1,915,896


1,935,318


1,931,040


(1

)

(1

)

Average total deposits

1,297,178


1,311,592


1,299,191


(1

)

-


Average consumer and small business banking deposits (4)

755,483


757,541


758,754


-


-


Net interest margin

2.84

%

2.84


2.87


-


(1

)

At Period End

Debt securities (5)

$

472,968


473,366


456,969


-


4


Loans

947,308


956,770


958,405


(1

)

(1

)

Allowance for loan losses

10,373


11,004


11,168


(6

)

(7

)

Goodwill

26,445


26,587


26,666


(1

)

(1

)

Equity securities (5)

58,935


62,497


56,991


(6

)

3


Assets

1,915,388


1,951,757


1,951,501


(2

)

(2

)

Deposits

1,303,689


1,335,991


1,325,444


(2

)

(2

)

Common stockholders' equity

181,150


183,134


178,209


(1

)

2


Wells Fargo stockholders' equity

204,952


206,936


201,321


(1

)

2


Total equity

205,910


208,079


202,310


(1

)

2


Tangible common equity (1)

151,878


153,730


148,671


(1

)

2


Capital ratios (6)(7):

Total equity to assets

10.75

%

10.66


10.37


1


4


Risk-based capital:



Common Equity Tier 1

11.92


12.28


11.52


(3

)

3


Tier 1 capital

13.76


14.14


13.27


(3

)

4


Total capital

16.92


17.46


16.41


(3

)

3


Tier 1 leverage

9.32


9.35


9.07


-


3


Common shares outstanding

4,873.9


4,891.6


4,996.7


-


(2

)

Book value per common share (8)

$

37.17


37.44


35.67


(1

)

4


Tangible book value per common share (1)(8)

31.16


31.43


29.75


(1

)

5


Common stock price:

High

66.31


62.24


59.99


7


11


Low

50.70


52.84


53.35


(4

)

(5

)

Period end

52.41


60.67


55.66


(14

)

(6

)

Team members (active, full-time equivalent)

265,700


262,700


272,800


1


(3

)

(1)

Tangible common equity is a non-GAAP financial measure and represents total equity less preferred equity, noncontrolling interests, and goodwill and certain identifiable intangible assets (including goodwill and intangible assets associated with certain of our nonmarketable equity securities, but excluding mortgage servicing rights), net of applicable deferred taxes. The methodology of determining tangible common equity may differ among companies. Management believes that return on average tangible common equity and tangible book value per common share, which utilize tangible common equity, are useful financial measures because they enable investors and others to assess the Company's use of equity. For additional information, including a corresponding reconciliation to GAAP financial measures, see the "Capital Management – Tangible Common Equity" section in this Report.

(2)

The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).

(3)

Pre-tax pre-provision profit (PTPP) is total revenue less noninterest expense. Management believes that PTPP is a useful financial measure because it enables investors and others to assess the Company's ability to generate capital to cover credit losses through a credit cycle.

(4)

Consumer and small business banking deposits are total deposits excluding mortgage escrow and wholesale deposits.

(5)

Financial information for prior quarters has been revised to reflect the impact of the adoption of Accounting Standards Update (ASU) 2016-01 Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities , which amends the presentation and accounting for certain financial instruments, including equity securities. See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for more information.

(6)

The risk-based capital ratios were calculated under the lower of Standardized or Advanced Approach determined pursuant to Basel III with Transition Requirements. For March 31, 2018 and December 31, 2017, the risk-based capital ratios were all lower under the Standardized Approach. The total capital ratio was lower under the Advanced Approach and the other ratios were lower under the Standardized Approach, for March 31, 2017.

(7)

See the "Capital Management" section and Note 22 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report for additional information.

(8)

Book value per common share is common stockholders' equity divided by common shares outstanding. Tangible book value per common share is tangible common equity divided by common shares outstanding.


2

Overview (continued)


This Quarterly Report, including the Financial Review and the Financial Statements and related Notes, contains forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not unduly rely on forward-looking statements. Actual results may differ materially from our forward-looking statements due to several factors. Factors that could cause our actual results to differ materially from our forward-looking statements are described in this Report, including in the "Forward-Looking Statements" section, and the "Risk Factors" and "Regulation and Supervision" sections of our Annual Report on Form 10-K for the year ended December 31, 2017 ( 2017 Form 10-K).

When we refer to "Wells Fargo," "the Company," "we," "our" or "us" in this Report, we mean Wells Fargo & Company and Subsidiaries (consolidated). When we refer to the "Parent," we mean Wells Fargo & Company. See the Glossary of Acronyms for terms used throughout this Report.

Financial Review

1


Overview

Wells Fargo & Company is a diversified, community-based financial services company with $1.92 trillion in assets. Founded in 1852 and headquartered in San Francisco, we provide banking, investments, mortgage, and consumer and commercial finance through 8,200 locations, 13,000 ATMs, digital (online, mobile and social), and contact centers (phone, email and correspondence), and we have offices in 42 countries and territories to support customers who conduct business in the global economy. With approximately 265,000 active, full-time equivalent team members, we serve one in three households in the United States and ranked No. 25 on Fortune's  2017 rankings of America's largest corporations. We ranked fourth in assets and third in the market value of our common stock among all U.S. banks at March 31, 2018 .

We use our Vision, Values and Goals to guide us toward growth and success. Our vision is to satisfy our customers' financial needs and help them succeed financially. We aspire to create deep and enduring relationships with our customers by providing them with an exceptional experience and by understanding their needs and delivering the most relevant products, services, advice, and guidance.

We have five primary values, which are based on our vision and guide the actions we take. First, we place customers at the center of everything we do. We want to exceed customer expectations and build relationships that last a lifetime. Second, we value and support our people as a competitive advantage and strive to attract, develop, motivate, and retain the best team members. Third, we strive for the highest ethical standards of integrity, transparency, and principled performance. Fourth, we value and promote diversity and inclusion in all aspects of business and at all levels. Fifth, we look to each of our team members to be a leader in establishing, sharing, and communicating our vision for our customers, communities, team members, and shareholders. In addition to our five primary values, one of our key day-to-day priorities is to make risk management a competitive advantage by working hard to ensure that appropriate controls are in place to reduce risks to our customers, maintain and increase our competitive market position, and protect Wells Fargo's long-term safety, soundness, and reputation.



1

Prior period financial information has been revised to reflect our adoption of Accounting Standards Update (ASU) 2016-01 Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . See Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report for more information.


In keeping with our primary values and risk management priorities, we have six long-term goals for the Company, which entail becoming the financial services leader in the following areas:

Customer service and advice – provide exceptional service and guidance to our customers to help them succeed financially.

Team member engagement – be a company where people feel included, valued, and supported; everyone is respected; and we work as a team.

Innovation – create lasting value for our customers and increased efficiency for our operations through innovative thinking, industry-leading technology, and a willingness to test and learn.

Risk management – set the global standard in managing all forms of risk.

Corporate citizenship – make a positive contribution to communities through philanthropy, advancing diversity and inclusion, creating economic opportunity, and promoting environmental sustainability.

Shareholder value – deliver long-term value for shareholders.


Over the past year and a half, our Board of Directors (Board) has taken, and continues to take, actions to enhance Board oversight and governance. These actions, many of which reflected results from the Board's 2017 self-assessment, which was facilitated by a third party, and the feedback we received from our shareholders and other stakeholders, included:

Separating the roles of Chairman of the Board and Chief Executive Officer.

Amending Wells Fargo's By-Laws to require that the Chairman be an independent director.

Electing Elizabeth A. "Betsy" Duke as our new independent Board Chair, effective January 1, 2018.

Making changes to the leadership and composition of key Board committees, including appointing new chairs of the Board's Risk Committee and Governance and Nominating Committee.

Amending Board committee charters and working with management to improve reporting to the Board in order to enhance the Board's risk oversight.

Electing six new independent directors, including directors with financial services, risk management, regulatory, technology, human capital management, social responsibility, and other relevant experience, with five directors retiring in 2017 and four more retiring at our 2018 annual meeting of shareholders. At the 2018 annual meeting, shareholders elected the 12 director nominees named in the Company's proxy statement.



3


As has been our practice, we will continue our engagement efforts with our shareholders and other stakeholders while the Board maintains its focus on enhancing oversight and governance.


Federal Reserve Board Consent Order Regarding Governance Oversight and Compliance and Operational Risk Management

On February 2, 2018, the Company entered into a consent order with the Board of Governors of the Federal Reserve System (FRB). As required by the consent order, the Board submitted to the FRB a plan to further enhance the Board's governance and oversight of the Company, and the Company submitted to the FRB a plan to further improve the Company's compliance and operational risk management program. As part of the review and approval process contemplated by the consent order, the Company will respond to any feedback provided by the FRB regarding the plans, including by making any necessary changes to the plans. The consent order also requires the Company, following the FRB's acceptance and approval of the plans and the Company's adoption and implementation of the plans, to complete by September 30, 2018, third-party reviews of the enhancements and improvements provided for in the plans. Until these third-party reviews are complete and the plans are approved and implemented to the satisfaction of the FRB, the Company's total consolidated assets will be limited to the level as of December 31, 2017. Compliance with this asset cap will be measured on a two-quarter daily average basis to allow for management of temporary fluctuations. Once the asset cap limitation is removed, a second third-party review must be conducted to assess the efficacy and sustainability of the improvements. During first quarter 2018 our average assets were below our level of total assets as of December 31, 2017.


Consent Orders with the Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of the Currency (OCC) Regarding Compliance Risk Management Program, Automobile Collateral Protection Insurance Policies, and Mortgage Interest Rate Lock Extensions

On April 20, 2018 we entered into consent orders with the CFPB and OCC to pay an aggregate of $1 billion in civil money penalties to resolve matters regarding our compliance risk management program and past practices involving certain automobile collateral protection insurance policies and certain mortgage interest rate lock extensions. The consent orders require that the Company submit to the CFPB and OCC, within 60 days of the date of the consent orders, an acceptable enterprise-wide compliance risk management plan and a plan to enhance the Company's internal audit program with respect to federal consumer financial law and the terms of the consent orders. The consent orders also require the Company to submit for non-objection, within 120 days of the date of the consent orders, plans for a remediation program regarding ongoing compliance with federal consumer financial law and, within 60 days of the date of the consent orders, plans to remediate customers affected by the automobile collateral protection insurance and mortgage interest rate lock matters.


Sales Practices Matters

As we have previously reported, in September 2016 we announced settlements with the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC), and the Office of the Los Angeles City Attorney, and entered into consent orders with the CFPB and the OCC, in

connection with allegations that some of our retail customers received products and services they did not request. As a result, it remains our top priority to rebuild trust through a comprehensive action plan that includes making things right for our customers, team members, and other stakeholders, and building a better Company for the future.

Our priority of rebuilding trust has included numerous actions focused on identifying potential financial harm and customer remediation. The Board and management are conducting company-wide reviews of sales practices issues. These reviews are ongoing. In August 2017, a third-party consulting firm completed an expanded data-driven review of retail banking accounts opened from January 2009 to September 2016 to identify financial harm stemming from potentially unauthorized accounts. We have provided customer remediation based on the expanded account analysis.

For additional information regarding sales practices matters, including related legal matters, see the "Risk Factors" section in our 2017 Form 10-K and Note 13 (Legal Actions) to Financial Statements in this Report.


Additional Efforts to Rebuild Trust

Our priority of rebuilding trust has also included an effort to identify other areas or instances where customers may have experienced financial harm. We are working with our regulatory agencies in this effort. As part of this effort, we are focused on the following key areas:

Automobile Lending Business Practices concerning the origination, servicing, and/or collection of consumer automobile loans, including related insurance products. For example:

In July 2017, the Company announced a plan to remediate customers who may have been financially harmed due to issues related to automobile collateral protection insurance (CPI) policies purchased through a third-party vendor on their behalf. The practice of placing CPI was discontinued by the Company on September 30, 2016. Commencing in August 2017, the Company began sending refund checks and/or letters to affected customers through which they may claim or otherwise receive remediation compensation for policies placed between October 15, 2005, and September 30, 2016. The Company currently estimates that it will provide approximately $158 million in cash remediation and $29 million in account adjustments under the plan. The amount of remediation may be affected by the requirements of the consent orders entered into with the CFPB and OCC described above.

The Company has identified certain issues related to the unused portion of guaranteed automobile protection waiver or insurance agreements between the dealer and, by assignment, the lender, which may result in refunds to customers in certain states.

Mortgage Interest Rate Lock Extensions In October 2017, the Company announced plans to reach out to all home lending customers who paid fees for mortgage rate lock extensions requested from September 16, 2013, through February 28, 2017, and to provide refunds, with interest, to customers who believe they should not have paid those fees. The plan to issue refunds follows an internal review that determined a rate lock extension policy implemented in September 2013 was, at times, not consistently applied, resulting in some borrowers being charged fees in cases where the Company was primarily responsible for the delays that made the extensions necessary. Effective March 1, 2017,


4

Overview (continued)


the Company changed how it manages the mortgage rate lock extension process by establishing a centralized review team that reviews all rate lock extension requests for consistent application of the policy. A total of approximately $98 million in rate lock extension fees was assessed on approximately 110,000 accounts during the period in question. Although the Company believes a substantial number of these fees were appropriately charged under its policy, we estimate refunds will be issued to a majority of our customers who paid rate lock extension fees during this time period due to our customer-oriented remediation approach.

Add-on Products Practices related to certain consumer "add-on" products, including identity theft and debt protection products that were subject to an OCC consent order entered into in June 2015. An ongoing review of "add-on" products across the Company is occurring, and we have begun remediation efforts where we have identified impacted customers.

Consumer Deposit Account Freezing/Closing Procedures regarding the freezing (and, in many cases, closing) of consumer deposit accounts after the Company detected suspected fraudulent activity (by third-parties or account holders) that affected those accounts.

Review of Certain Activities Within Wealth and Investment Management A review of certain activities within Wealth and Investment Management (WIM) being conducted by the Board, in response to inquiries from federal government agencies, is assessing whether there have been inappropriate referrals or recommendations, including with respect to rollovers for 401(k) plan participants, certain alternative investments, or referrals of brokerage customers to the Company's investment and fiduciary services business. The review is ongoing.

Fiduciary and Custody Account Fee Calculations The Company is reviewing fee calculations within certain fiduciary and custody accounts in its investment and fiduciary services business, which is part of the wealth management business in WIM. The Company has determined that there have been instances of incorrect fees being applied to certain assets and accounts, resulting in overcharges. These issues include the incorrect set-up and maintenance in the system of record of the values associated with certain assets. Systems, operations, and account-level reviews are underway to determine the extent of any assets and accounts affected, and root cause analyses are being performed with the assistance of third parties. These reviews are ongoing and, as a result of its reviews to date, the Company has suspended fees on some assets and accounts, has notified the affected customers, and is continuing its analysis of those assets and accounts. As these reviews continue, the Company will consider suspending fees on additional assets and accounts, while continuing the process of analyzing those assets and accounts.

Foreign Exchange Business The Company is reviewing policies, practices, and procedures in its foreign exchange (FX) business. The Company is also responding to inquiries from government agencies in connection with their reviews of certain aspects of our FX business.


To the extent issues are identified, we will continue to assess any customer harm and provide remediation as appropriate. This effort to identify other instances in which customers may have experienced harm is ongoing, and it is possible that we may identify other areas of potential concern. For more information,

including related legal and regulatory risk, see the "Risk Factors" section in our 2017 Form 10-K and Note 13 (Legal Actions) to Financial Statements in this Report.


Financial Performance

Wells Fargo net income was $5.1 billion in first quarter 2018 with diluted earnings per common share (EPS) of $ 0.96 , compared with $5.6 billion and $1.03 , respectively, a year ago. First quarter 2018 results reflected an $800 million discrete litigation accrual in connection with entering into the consent orders with the CFPB and OCC on April 20, 2018, and also included:

revenue was $21.9 billion , down $321 million compared with a year ago, with net interest income down 1% and noninterest income down 2% from a year ago;

average loans were $951.0 billion, down $12.6 billion, or 1%, from a year ago;

total deposits were $1.3 trillion , down $21.8 billion , or 2% , from a year ago;

return on assets (ROA) of 1.09% and return on equity (ROE) of 10.58% , down from 1.18% and 11.96% , respectively, compared with a year ago;

our credit results improved with a net charge-off rate of 0.32% (annualized) of average loans in first quarter 2018, compared with 0.34% a year ago;

nonaccrual loans of $7.7 billion, down $2.0 billion, or 21%, from a year ago; and

we returned $4.0 billion to shareholders through common stock dividends and net share repurchases, which was the 11th consecutive quarter of returning more than $3 billion.


Balance Sheet and Liquidity

Despite the asset cap placed on us from the consent order with the FRB, our balance sheet remained strong during first quarter 2018 with strong credit quality and solid levels of liquidity and capital. Our total assets were $1.92 trillion at March 31, 2018 . Cash and other short-term investments decreased $20.0 billion from December 31, 2017 , reflecting lower deposit balances. Debt securities were $473.0 billion at March 31, 2018 , with approximately $13 billion of gross purchases during first quarter 2018 , more than offset by run-off and sales. Loans were down $9.5 billion, or 1%, from December 31, 2017 , primarily due to a decline in automobile and junior lien mortgage loans.

Average deposits in first quarter 2018 were $1.30 trillion , down $2.0 billion from first quarter 2017 as lower commercial deposits from financial institutions were partially offset by higher interest-bearing checking deposits. Our average deposit cost in first quarter 2018 was 34 basis points, up 17 basis points from a year ago, primarily driven by an increase in commercial and Wealth and Investment Management deposit rates.


Credit Quality

Solid overall credit results continued in first quarter 2018 as losses remained low and we continued to originate high quality loans, reflecting our long-term risk focus. Net charge-offs were $741 million , or 0.32% (annualized) of average loans, in first quarter 2018 , compared with $805 million a year ago ( 0.34% ). The decrease in net charge-offs in first quarter 2018 , compared with a year ago, was driven by lower losses in the commercial and industrial loan portfolio, including in the oil and gas portfolio.

Our commercial portfolio net charge-offs were $78 million , or 6 basis points of average commercial loans, in first quarter 2018 , compared with net charge-offs of $143 million , or 11 basis points, a year ago. Net consumer credit losses increased to 60 basis points (annualized) of average consumer loans in first quarter 2018 from 59 basis points (annualized) in first quarter


5


2017 . Our commercial real estate portfolios were in a net recovery position for the 21st consecutive quarter, reflecting our conservative risk discipline and improved market conditions. Net losses on our consumer real estate portfolios improved by $56 million, or 187%, to a net recovery of $26 million from a year ago, reflecting the benefit of the continued improvement in the housing market and our continued focus on originating high quality loans. Approximately 80% of the consumer first mortgage loan portfolio outstanding at March 31, 2018 , was originated after 2008, when more stringent underwriting standards were implemented.

The allowance for credit losses as of March 31, 2018 , decreased $974 million compared with a year ago and decreased $647 million from December 31, 2017. We had a $550 million release in the allowance for credit losses in first quarter 2018, with approximately $400 million driven by an improvement in our outlook for 2017 hurricane-related losses. The allowance coverage for total loans was 1.19% at March 31, 2018 , compared with 1.28% a year ago and 1.25% at December 31, 2017. The allowance covered 3.8 times annualized first quarter net charge-offs, compared with 3.8 times a year ago. Future allowance levels will be based on a variety of factors, including loan growth, portfolio performance and general economic conditions. Our provision for loan losses was $191 million in first quarter 2018 , down from $605 million a year ago, primarily reflecting an improvement in our outlook for 2017 hurricane-related losses, as well as continued improvement in residential real estate and lower loan balances.

Nonperforming assets decreased $388 million , or 4% , from December 31, 2017 , the eighth consecutive quarter of decreases, with improvement across our consumer and commercial portfolios and lower foreclosed assets. Nonperforming assets were 0.88% of total loans, the lowest level since the merger with Wachovia in 2008. Nonaccrual loans decreased $317 million from the prior quarter largely due to a decrease in commercial nonaccruals. In addition, foreclosed assets were down $71 million from the prior quarter.


Capital

Our financial performance in first quarter 2018 allowed us to maintain a solid capital position, with total equity of $205.9 billion at March 31, 2018 , compared with $208.1 billion at December 31, 2017. We returned $4.0 billion to shareholders in first quarter 2018 through common stock dividends and net share repurchases, an increase of 30% from a year ago. Our net payout ratio (which is the ratio of (i) common stock dividends and share repurchases less issuances and stock compensation-related items, divided by (ii) net income applicable to common stock) was 85%. We continued to reduce our common shares outstanding through the repurchase of 50.6 million common shares in the quarter. We entered into a $1 billion forward repurchase contract with an unrelated third party in April 2018 that is expected to settle in third quarter 2018 for approximately 20 million shares. We expect to reduce our common shares outstanding through share repurchases throughout the remainder of 2018 .

We believe an important measure of our capital strength is the Common Equity Tier 1 (CET1) ratio under Basel III, fully phased-in, which was 11.92 % at March 31, 2018 , well above our internal target of 10%. The decline in our CET1 ratio from December 31, 2017, reflected other comprehensive income resulting from higher interest rates and capital distributions, partially offset by capital generation from earnings, lower risk-weighted assets (RWA) driven by lower loan balances and improved RWA efficiency. Likewise, our other regulatory capital ratios remained strong. See the "Capital Management" section in this Report for more information regarding our capital, including the calculation of our regulatory capital amounts.

Earnings Performance

Wells Fargo net income for first quarter 2018 was $5.1 billion ( $0.96 ), compared with $5.6 billion ( $1.03 ) for the same period a year ago. Our financial performance in first quarter 2018 , compared with the same period a year ago, benefited from a $414 million decrease in our provision for credit losses, offset by a $86 million decrease in net interest income, a $235 million decrease in noninterest income, and a $1.3 billion increase in noninterest expense. First quarter 2018 results also benefited from the lower income tax rate. Net interest income represented 56% of revenue, compared with 55% for the same period a year ago. Noninterest income was $9.7 billion in first quarter 2018 , representing 44% of revenue, compared with $9.9 billion ( 45% ) in first quarter 2017 .

Revenue, the sum of net interest income and noninterest income, was $21.9 billion in first quarter 2018 , compared with $22.3 billion for first quarter 2017 . The decrease in revenue for first quarter 2018 , compared with the same period in 2017 , was due to a decline in both net interest income and in noninterest income.


6

Earnings Performance ( continued )





Net Interest Income

Net interest income is the interest earned on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest paid on deposits, short-term borrowings and long-term debt. The net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and our other sources of funding. Net interest income and the net interest margin are presented on a taxable-equivalent basis in Table 1 to reflect income from taxable and tax-exempt loans and debt and equity securities based on a 21% and 35% federal statutory tax rate for first quarter 2018 and first quarter 2017, respectively.

Net interest income and the net interest margin in any one period can be significantly affected by a variety of factors including the mix and overall size of our earning assets portfolio and the cost of funding those assets. In addition, some variable sources of interest income, such as resolutions from purchased credit-impaired (PCI) loans, loan fees and collection of interest on nonaccrual loans, can vary from period to period.

Net interest income on a taxable-equivalent basis was $12.4 billion in first quarter 2018 , compared with $12.6 billion for the same period a year ago. The net interest margin was 2.84% for first quarter 2018 , down from 2.87% for the same period a year ago. The decrease in net interest income and net interest margin in first quarter 2018 , compared with the same period a year ago, was driven by lower loan swap income due to unwinding the receive-fixed loan swap portfolio, unfavorable hedge ineffectiveness accounting, lower tax-equivalent net interest income from updated tax-equivalent factors, lower loan balances, and higher premium amortization, partially offset by the net repricing benefit of higher interest rates, growth in interest income from debt and equity securities, lower long-term debt balances, and higher variable income.



Average earning assets decreased $15.9 billion in first quarter 2018 , compared with the same period a year ago. Compared with the same period a year ago:

average loans decreased $12.6 billion ;

average interest-earning deposits decreased $ 36.2 billion ;

average federal funds sold and securities purchased under resale agreements increased $2.9 billion ;

average debt securities increased $19.3 billion ;

average equity securities increased $5.8 billion ; and

other earning assets increased $6.0 billion .


Deposits are an important low-cost source of funding and affect both net interest income and the net interest margin. Deposits include noninterest-bearing deposits, interest-bearing checking, market rate and other savings, savings certificates, other time deposits, and deposits in foreign offices. Average deposits of $1.30 trillion in first quarter 2018 were relatively stable compared with the same period a year ago, and represented 136% of average loans in first quarter 2018 , compared with 135% in first quarter 2017 . Average deposits were 74% of average earning assets in first quarter 2018 , compared with 73% in first quarter 2017 . The average deposit cost for first quarter 2018 was 34 basis points, up 17 basis points from a year ago, primarily driven by an increase in commercial and Wealth and Investment Management deposit rates.


7


Table 1: Average Balances, Yields and Rates Paid (Taxable-Equivalent Basis) (1)(2)

Quarter ended March 31,

2018


2017


(in millions)

Average

balance


Yields/

rates


Interest

income/

expense


Average

balance


Yields/

rates


Interest

income/

expense


Earning assets

Interest-earning deposits with banks (3)

$

172,291


1.49

%

$

632


208,486


0.79

%

$

405


Federal funds sold and securities purchased under resale agreements (3)

78,135


1.40


271


75,281


0.68


127


Debt securities (4): 

Trading debt securities

78,715


3.24


637


69,120


3.03


523


Available-for-sale debt securities:

Securities of U.S. Treasury and federal agencies

6,426


1.66


26


25,034


1.54


95


Securities of U.S. states and political subdivisions (7)

49,956


3.37


421


52,248


3.93


513


Mortgage-backed securities:

Federal agencies

158,472


2.72


1,076


156,617


2.58


1,011


Residential and commercial (7)

8,871


4.12


91


14,452


5.34


193


Total mortgage-backed securities (7)

167,343


2.79


1,167


171,069


2.81


1,204


Other debt securities (7)

48,094


3.73


444


50,149


3.61


447


Total available-for-sale debt securities (7)

271,819


3.04


2,058


298,500


3.04


2,259


Held-to-maturity debt securities:

Securities of U.S. Treasury and federal agencies

44,723


2.20


243


44,693


2.20


243


Securities of U.S. states and political subdivisions

6,259


4.34


68


6,273


5.30


83


Federal agency and other mortgage-backed securities

90,789


2.38


541


51,786


2.51


324


Other debt securities

695


3.23


5


3,329


2.34


19


Total held-to-maturity debt securities

142,466


2.42


857


106,081


2.54


669


Total debt securities (7)

493,000


2.89


3,552


473,701


2.92


3,451


Mortgages held for sale (5)(7)

18,406


3.89


179


19,893


3.67


182


Loans held for sale (5)

2,011


4.92


24


1,600


2.50


10


Commercial loans:

Commercial and industrial – U.S.

272,040


3.85


2,584


274,749


3.59


2,436


Commercial and industrial – Non U.S.

60,216


3.23


479


55,347


2.73


373


Real estate mortgage

126,200


4.05


1,262


132,449


3.56


1,164


Real estate construction

24,449


4.54


274


24,591


3.72


225


Lease financing

19,265


5.30


255


19,070


4.94


235


Total commercial loans

502,170


3.91


4,854


506,206


3.54


4,433


Consumer loans:

Real estate 1-4 family first mortgage

284,207


4.02


2,852


275,480


4.02


2,766


Real estate 1-4 family junior lien mortgage

38,844


5.13


493


45,285


4.60


515


Credit card

36,468


12.75


1,147


35,437


11.97


1,046


Automobile

51,469


5.16


655


61,510


5.46


828


Other revolving credit and installment

37,866


6.46


604


39,727


6.02


590


Total consumer loans

448,854


5.16


5,751


457,439


5.06


5,745


Total loans (5)

951,024


4.50


10,605


963,645


4.26


10,178


Equity securities

39,754


2.35


233


33,926


2.11


179


Other

6,015


1.21


19


-


-


-


Total earning assets (7)

$

1,760,636


3.55

%

$

15,515


1,776,532


3.30

%

$

14,532


Funding sources

Deposits:

Interest-bearing checking

$

67,774


0.77

%

$

129


50,686


0.29

%

$

37


Market rate and other savings

679,068


0.22


368


684,175


0.09


157


Savings certificates

20,018


0.34


17


23,466


0.29


17


Other time deposits (7)

76,589


1.84


347


54,915


1.30


177


Deposits in foreign offices

94,810


0.98


229


122,200


0.49


148


Total interest-bearing deposits (7)

938,259


0.47


1,090


935,442


0.23


536


Short-term borrowings

101,779


1.24


312


98,549


0.47


115


Long-term debt (7)

226,062


2.80


1,576


260,130


1.77


1,147


Other liabilities

27,927


1.92


132


16,806


2.22


92


Total interest-bearing liabilities (7)

1,294,027


0.97


3,110


1,310,927


0.58


1,890


Portion of noninterest-bearing funding sources (7)

466,609


-


-


465,605


-


-


Total funding sources (7)

$

1,760,636


0.71


3,110


1,776,532


0.43


1,890


Net interest margin and net interest income on a taxable-equivalent basis (6)(7)

2.84

%

$

12,405


2.87

%

$

12,642


Noninterest-earning assets

Cash and due from banks

$

18,853


18,706


Goodwill

26,516


26,673


Other (7)

109,891


109,129


Total noninterest-earning assets (7)

$

155,260


154,508


Noninterest-bearing funding sources

Deposits

$

358,919


363,749


Other liabilities (7)

56,770


54,805


Total equity (7)

206,180


201,559


Noninterest-bearing funding sources used to fund earning assets (7)

(466,609

)

(465,605

)

Net noninterest-bearing funding sources (7)

$

155,260


154,508


Total assets (7)

$

1,915,896


1,931,040


(1)

Our average prime rate was 4.52% and 3.80% for the quarters ended March 31, 2018 and 2017 , respectively. The average three-month London Interbank Offered Rate (LIBOR) was 1.93% and 1.07% for the quarters ended March 31, 2018 and 2017 , respectively.

(2)

Yields/rates and amounts include the effects of hedge and risk management activities associated with the respective asset and liability categories.

(3)

Financial information has been revised to reflect the impact of the adoption of Accounting Standards Update (ASU) 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash in which we changed the presentation of our cash and cash equivalents to include both cash and due from banks as well as interest-earning deposits with banks, which are inclusive of any restricted cash.

(4)

Yields and rates are based on interest income/expense amounts for the period, annualized based on the accrual basis for the respective accounts. The average balance amounts represent amortized cost for the periods presented.

(5)

Nonaccrual loans and related income are included in their respective loan categories.

(6)

Includes taxable-equivalent adjustments of $167 million and $318 million for the quarters ended March 31, 2018 and 2017 , respectively, predominantly related to tax-exempt income on certain loans and securities. The federal statutory tax rate utilized was 21% and 35% for quarters ended March 31, 2018 and 2017 , respectively.

(7)

Financial information for the prior quarter has been revised to reflect the impact of the adoption in fourth quarter 2017 of ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities .


8

Earnings Performance ( continued )





Noninterest Income

Table 2: Noninterest Income

Quarter ended March 31,

%


(in millions)

2018


2017


Change


Service charges on deposit accounts

$

1,173


1,313


(11

)%

Trust and investment fees:

Brokerage advisory, commissions and other fees

2,403


2,324


3


Trust and investment management

850


829


3


Investment banking

430


417


3


Total trust and investment fees

3,683


3,570


3


Card fees

908


945


(4

)

Other fees:


Charges and fees on loans

301


307


(2

)

Cash network fees

126


126


-


Commercial real estate brokerage commissions

85


81


5


Letters of credit fees

79


74


7


Wire transfer and other remittance fees

116


107


8


All other fees

93


170


(45

)

Total other fees

800



865


(8

)

Mortgage banking:


Servicing income, net

468


456


3


Net gains on mortgage loan origination/sales activities

466


772


(40

)

Total mortgage banking

934



1,228


(24

)

Insurance

114


277


(59

)

Net gains from trading activities

243


272


(11

)

Net gains on debt securities

1


36


(97

)

Net gains from equity securities

783


570


37


Lease income

455


481


(5

)

Life insurance investment income

164


144


14


All other

438


230


90


Total

$

9,696



9,931


(2

)

Noninterest income was $9.7 billion for first quarter 2018, compared with $9.9 billion for the same period a year ago. This income represented 44% of revenue for first quarter 2018 , compared with 45% for the same period a year ago. The decline in noninterest income in first quarter 2018 , compared with the same period a year ago, was predominantly due to lower mortgage banking income, lower insurance income due to the sale of Wells Fargo Insurance Services in fourth quarter 2017, and lower service charges on deposit accounts. These decreases were partially offset by growth in trust and investment fees, higher net gains from equity securities, and higher all other income. For more information on our performance obligations and the nature of services performed for certain of our revenues discussed below, see Note 17 (Revenue from Contracts with Customers) to Financial Statements in this Report.

Service charges on deposit accounts were $1.2 billion in first quarter 2018 , compared with $1.3 billion for the same period a year ago. The decrease in first quarter 2018 , compared with the same period a year ago, was due to lower overdraft fees driven by customer-friendly changes including the first full quarter impact of Overdraft Rewind SM , and the impact of a higher earnings credit rate applied to commercial accounts due to increased interest rates.

Brokerage advisory, commissions and other fees increased to $2.4 billion in first quarter 2018 , compared with $2.3 billion for the same period in 2017 . The increase in first quarter 2018 , compared with the same period in 2017 , was due to higher asset-

based fees, partially offset by lower transactional commission revenue. Retail brokerage client assets totaled $1.6 trillion  at both March 31, 2018 and 2017, with all retail brokerage services provided by our Wealth and Investment Management (WIM) operating segment. For additional information on retail brokerage client assets, see the discussion and Tables 4d and 4e in the "Operating Segment Results – Wealth and Investment Management – Retail Brokerage Client Assets" section in this Report.

Trust and investment management fee income is largely from client assets under management (AUM) for which fees are based on a tiered scale relative to market value of the assets, and client assets under administration (AUA), for which fees are generally based on the extent of services to administer the assets. Trust and investment management fees modestly increased to $850 million in first quarter 2018 , from $829 million in first quarter 2017 , largely due to growth in management fees for investment advice on mutual funds. Our AUM totaled $680.4 billion at March 31, 2018 , compared with $654.9 billion at March 31, 2017 , with substantially all of our AUM managed by our WIM operating segment. Additional information regarding our WIM operating segment AUM is provided in Table 4f and the related discussion in the "Operating Segment Results – Wealth and Investment Management – Trust and Investment Client Assets Under Management" section in this Report. Our AUA totaled $1.7 trillion at March 31, 2018 , compared with $1.6 trillion at March 31, 2017 .


9


Investment banking fees increased to $430 million in first quarter 2018 , from $417 million for the same period in 2017 , reflecting the impact of the new accounting standard for revenue recognition, which increased investment banking fees and increased noninterest expense by an equal amount due to the underwriting expenses of our broker-dealer business that were previously netted against revenue are now included in noninterest expense. The increase in fees was partially offset by lower advisory fees and equity originations.

Card fees were $908 million in first quarter 2018 , down from $945 million in first quarter 2017, reflecting higher rewards costs and the impact of the new accounting standard for revenue recognition, which lowered card fees and reduced noninterest expense by an equal amount due to the netting of card payment network charges against related interchange and network revenues in card fees. These decreases were partially offset by an increase in interchange fees due to higher purchase activity.

Other fees decreased to $800 million in first quarter 2018 , from $865 million for the same period in 2017 , predominantly driven by lower all other fees. All other fees were $93 million in first quarter 2018 , compared with $170 million for the same period in 2017 , driven by lower other fees from discontinued products.

Mortgage banking noninterest income, consisting of net servicing income and net gains on mortgage loan origination/sales activities, totaled $934 million in first quarter 2018 , compared with $1.2 billion for the same period a year ago.

In addition to servicing fees, net mortgage loan servicing income includes amortization of commercial mortgage servicing rights (MSRs), changes in the fair value of residential MSRs during the period, as well as changes in the value of derivatives (economic hedges) used to hedge the residential MSRs. Net servicing income of $468 million for first quarter 2018  included a $110 million net MSR valuation gain ( $1.3 billion increase in the fair value of the MSRs and a $1.2 billion hedge loss). Net servicing income of $456 million for first quarter 2017 included a $102 million net MSR valuation gain ( $174 million increase in the fair value of the MSRs and a $72 million hedge loss).

Our portfolio of mortgage loans serviced for others was $1.71 trillion at March 31, 2018 , and $1.70 trillion at December 31, 2017 . At March 31, 2018 , the ratio of combined residential and commercial MSRs to related loans serviced for others was 0.96% , compared with 0.88% at December 31, 2017 . See the "Risk Management – Asset/Liability Management – Mortgage Banking Interest Rate and Market Risk" section in this Report for additional information regarding our MSRs risks and hedging approach.

Net gains on mortgage loan origination/sales activities were $466 million in first quarter 2018 , compared with $772 million for the same period a year ago. The decrease in first quarter 2018 , compared with the same period a year ago, was largely due to lower production margins. Total mortgage loan originations were $43 billion for first quarter 2018 , compared with $44 billion for the same period a year ago. The production margin on residential held-for-sale mortgage originations, which represents net gains on residential mortgage loan origination/sales activities divided by total residential held-for-sale mortgage originations, provides a measure of the profitability of our residential mortgage origination activity. Table 2a presents the information used in determining the production margin.


Table 2a: Selected Mortgage Production Data

Quarter ended March 31,

2018


2017


Net gains on mortgage loan origination/sales activities (in millions):

Residential

(A)

$

324


569


Commercial

76


101


Residential pipeline and unsold/repurchased loan management (1)

66


102


Total

$

466


772


Residential real estate originations (in billions):

Held-for-sale

(B)

$

34


34


Held-for-investment

9


10


Total

$

43


44


Production margin on residential held-for-sale mortgage originations

(A)/(B)

0.94

%

1.68


(1)

Predominantly includes the results of GNMA loss mitigation activities, interest rate management activities and changes in estimate to the liability for mortgage loan repurchase losses.


10

Earnings Performance ( continued )





The production margin was 0.94% for first quarter 2018 , compared with 1.68% for the same period in 2017. The decline in production margin in first quarter 2018 was attributable to lower margins in both our retail and correspondent production channels as well as a shift to more correspondent origination volume, which has a lower production margin. Mortgage applications were $58 billion for first quarter 2018 , compared with $59 billion for the same period a year ago. The 1-4 family first mortgage unclosed pipeline was $24 billion at March 31, 2018 , compared with $28 billion at March 31, 2017 . For additional information about our mortgage banking activities and results, see the "Risk Management – Asset/Liability Management – Mortgage Banking Interest Rate and Market Risk" section and Note 10 (Mortgage Banking Activities) and Note 15 (Fair Values of Assets and Liabilities) to Financial Statements in this Report.

Net gains on mortgage loan origination/sales activities include adjustments to the mortgage repurchase liability. Mortgage loans are repurchased from third parties based on standard representations and warranties, and early payment default clauses in mortgage sale contracts. For additional information about mortgage loan repurchases, see the "Risk Management – Credit Risk Management – Liability for Mortgage Loan Repurchase Losses" section and Note 10 (Mortgage Banking Activities) to Financial Statements in this Report.

Insurance income was $114 million in first quarter 2018 , compared with $277 million in the same period a year ago. The decrease in first quarter 2018 , compared with the same period a year ago, was driven by the sale of Wells Fargo Insurance Services in fourth quarter 2017.

Net gains from trading activities, which reflect unrealized changes in fair value of our trading positions and realized gains and losses, were $243 million in first quarter 2018 , compared with $272 million in the same period a year ago. The decrease in first quarter 2018 , compared with the same period a year ago, was driven by lower customer accommodation trading activity within our capital markets trading business. Net gains from trading activities do not include interest and dividend income and expense on trading securities. Those amounts are reported within interest income from debt and equity securities and other interest expense. For additional information about trading activities, see the "Risk Management – Asset/Liability Management – Market Risk-Trading Activities" section and Note 4 (Trading Activities) to Financial Statements in this Report.

Net gains on debt and equity securities totaled $784 million in first quarter 2018 , compared with $606 million in first quarter 2017 , after other-than-temporary impairment (OTTI) write-downs of $30 million for first quarter 2018 , compared with $128 million for the same period in 2017 . The increase in net gains on debt and equity securities in first quarter 2018 , compared with the same period a year ago, was driven by higher net gains from nonmarketable equity securities and $250 million of unrealized gains from the impact of the new accounting standard for financial instruments which requires any gain or loss associated with the fair value measurement of equity securities to be reflected in earnings. These increases were partially offset by lower net gains on debt securities and lower deferred compensation gains (offset in employee benefits expense).

Lease income was $455 million in first quarter 2018 , compared with $481 million for the same period a year ago. The decrease in first quarter 2018 , compared with the same period a year ago, was driven by lower rail and equipment lease income.

All other income was $438 million in first quarter 2018 , compared with $230 million for the same period a year ago. All other income includes ineffectiveness recognized on derivatives that qualify for hedge accounting, the results of certain economic hedges, losses on low income housing tax credit investments, foreign currency adjustments, and income from investments accounted for under the equity method, any of which can cause decreases and net losses in other income. The increase in all other income in first quarter 2018 , compared with the same period a year ago, was predominantly driven by a $643 million pre-tax gain from the sale of $1.6 billion of purchased credit-impaired Pick-a-Pay loans and a $202 million pre-tax gain from the sale of Wells Fargo Shareowner Services in first quarter 2018. These gains were partially offset by an unrealized loss of $(176) million for a lower of cost or market (LOCOM) adjustment related to the previously announced sale of certain assets and liabilities of Reliable Financial Services, Inc. (a subsidiary of Wells Fargo's automobile financing business), and lower income from equity method investments.


11


Noninterest Expense

Table 3: Noninterest Expense

Quarter ended March 31,

%


(in millions)

2018


2017


Change


Salaries

$

4,363


4,261


2

 %

Commission and incentive compensation

2,768


2,725


2


Employee benefits

1,598


1,686


(5

)

Equipment

617


577


7


Net occupancy

713


712


-


Core deposit and other intangibles

265


289


(8

)

FDIC and other deposit assessments

324


333


(3

)

Operating losses

1,468


282


421


Outside professional services

821


804


2


Contract services (1)

447


397


13


Operating leases

320


345


(7

)

Outside data processing

162


220


(26

)

Travel and entertainment

152


179


(15

)

Advertising and promotion

153


127


20


Postage, stationery and supplies

142


145


(2

)

Telecommunications

92


91


1


Foreclosed assets

38


86


(56

)

Insurance

26


24


8


All other (1)

573


509


13


Total

$

15,042


13,792


9


(1)

The prior period has been revised to conform with the current period presentation whereby temporary help is included in contract services rather than in all other noninterest expense.

Noninterest expense was $15.0 billion in first quarter 2018 , up 9% from $13.8 billion a year ago, predominantly driven by higher operating losses.

Personnel expenses, which include salaries, commissions, incentive compensation, and employee benefits, were up $57 million , or 1% , in first quarter 2018 compared with the same period a year ago. The increase was due to annual salary increases, higher incentive compensation, and higher employee benefits expense, partially offset by lower deferred compensation costs (offset in net gains from equity securities) and the impact of the sale of Wells Fargo Insurance Services in fourth quarter 2017.

Outside professional and contract services expense was up $67 million , or 6% , in first quarter 2018 , compared with the same period a year ago. The increase reflected higher project and technology spending on regulatory and compliance related initiatives, partially offset by lower legal expense.

Outside data processing was down $58 million in first quarter 2018, or 26%, compared with the same period a year ago, reflecting lower data processing expense related to the GE Capital business acquisitions and the impact of the new revenue recognition accounting standard, which reduced noninterest expense and lowered card fees by an equal amount due to the netting of card payment network charges against related interchange and network revenues in card fees.

Operating losses were up $1.2 billion , or 421% , in first quarter 2018 , compared with the same period a year ago, predominantly driven by the $800 million discrete litigation accrual in connection with entering into the consent orders with the CFPB and OCC on April 20, 2018. See Note 1 (Summary of Significant Accounting Policies – Subsequent Events) for additional information.

Foreclosed assets expense was down $48 million , or 56% , in first quarter 2018 , compared with the same period a year ago, due to lower foreclosed properties operating expenses and higher gains on sale of foreclosed properties.

All other noninterest expense was up $64 million , or 13% , in first quarter 2018 , compared with the same period a year ago. The increase was primarily driven by higher donations expense.

Our efficiency ratio was 68.6% in first quarter 2018 , compared with 62.0% in first quarter 2017 .


Income Tax Expense

Our effective income tax rate was 21.1% and 27.4% for first quarter 2018 and 2017, respectively. The decrease in the effective income tax rate for first quarter 2018 reflected the reduced U.S federal tax rate as part of the Tax Cuts & Jobs Act (the Tax Act) that was enacted in 2017, partially offset by the non-tax deductible treatment of the $800 million discrete litigation accrual in connection with entering into the consent orders with the CFPB and OCC on April 20, 2018. We continue to collect and analyze data related to provisional tax estimates recorded in fourth quarter 2017 and monitor interpretations that emerge for various provisions of the Tax Act. We anticipate these items will be finalized upon completion of our U.S. tax filings in 2018.



12

Earnings Performance ( continued )





Operating Segment Results

We are organized for management reporting purposes into three operating segments: Community Banking; Wholesale Banking; and WIM. These segments are defined by product type and customer segment and their results are based on our management accounting process, for which there is no comprehensive, authoritative financial accounting guidance equivalent to generally accepted accounting principles (GAAP). Effective first quarter 2018, assets and liabilities now receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on a more granular level. This methodology change affects results across all three of our

reportable operating segments and prior period operating segment results have been revised to reflect this methodology change. Our previously reported consolidated financial results were not impacted by the methodology change; however, in connection with the adoption of ASU 2016-01 in first quarter 2018, certain reclassifications have occurred within noninterest income. Table 4 and the following discussion present our results by operating segment. For additional description of our operating segments, including additional financial information and the underlying management accounting process, see Note 21 (Operating Segments) to Financial Statements in this Report.

Table 4: Operating Segment Results – Highlights

(income/expense in millions,

Community Banking

Wholesale Banking

Wealth and Investment Management

Other (1)

Consolidated

Company

average balances in billions)

2018


2017


2018


2017


2018


2017


2018


2017


2018


2017


Quarter ended March 31,

Revenue

$

11,830


11,823


7,279


7,577


4,242


4,257


(1,417

)

(1,402

)

21,934


22,255


Provision (reversal of provision) for credit losses

218


646


(20

)

(43

)

(6

)

(4

)

(1

)

6


191


605


Noninterest expense

8,702


7,281


3,978


4,167


3,290


3,204


(928

)

(860

)

15,042


13,792


Net income (loss)

1,913


2,824


2,875


2,485


714


665


(366

)

(340

)

5,136


5,634


Average loans

$

470.5


480.7


465.1


468.3


73.9


70.7


(58.5

)

(56.1

)

951.0


963.6


Average deposits

747.5


717.8


446.0


465.3


177.9


197.5


(74.2

)

(81.4

)

1,297.2


1,299.2


(1)

Includes the elimination of certain items that are included in more than one business segment, most of which represents products and services for WIM customers served through Community Banking distribution channels.


13


Community Banking offers a complete line of diversified financial products and services for consumers and small businesses including checking and savings accounts, credit and debit cards, and automobile, student, mortgage, home equity and small business lending, as well as referrals to Wholesale Banking and WIM business partners. The Community Banking segment also includes the results of our Corporate Treasury activities net of allocations (including funds transfer pricing, capital, liquidity and certain corporate expenses) in support of other segments and

results of investments in our affiliated venture capital partnerships. We announced on November 28, 2017, that we will exit the personal insurance business, and we have begun winding down activities and ceased offering personal insurance products, effective February 1, 2018. Effective April 2, 2018, we sold the majority of our interests in our personal insurance business to a third party. Table 4a provides additional financial information for Community Banking.

Table 4a: Community Banking

Quarter ended March 31,

(in millions, except average balances which are in billions)

2018


2017


% Change


Net interest income

$

7,195


7,132


1

 %

Noninterest income:

Service charges on deposit accounts

639


742


(14

)

Trust and investment fees:


Brokerage advisory, commissions and other fees (1)

478


444


8


Trust and investment management (1)

233


218


7


Investment banking (2)

(10

)

(27

)

63


Total trust and investment fees

701


635


10


Card fees

821


865


(5

)

Other fees

327


395


(17

)

Mortgage banking

842


1,106


(24

)

Insurance

28


34


(18

)

Net losses from trading activities

(1

)

(52

)

98


Net gains on debt securities

-


102


(100

)

Net gains from equity securities (3)

684


468


46


Other income of the segment

594


396


50


Total noninterest income

4,635


4,691


(1

)


Total revenue

11,830


11,823


-



Provision for credit losses

218


646


(66

)

Noninterest expense:


Personnel expense

5,511


5,201


6


Equipment

596


551


8


Net occupancy

534


526


2


Core deposit and other intangibles

101


112


(10

)

FDIC and other deposit assessments

181


192


(6

)

Outside professional services

397


349


14


Operating losses

1,440


261


452


Other expense of the segment

(58

)

89


NM


Total noninterest expense

8,702


7,281


20


Income before income tax expense and noncontrolling interests

2,910


3,896


(25

)

Income tax expense

809


982


(18

)

Net income from noncontrolling interests (4)

188


90


109


Net income

$

1,913


2,824


(32

)

Average loans

$

470.5


480.7


(2

)

Average deposits

747.5


717.8


4


NM - Not meaningful

(1)

Represents income on products and services for WIM customers served through Community Banking distribution channels and is eliminated in consolidation.

(2)

Includes syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment.

(3)

Predominantly represents gains resulting from venture capital investments.

(4)

Reflects results attributable to noncontrolling interests predominantly associated with the Company's consolidated venture capital investments.

Community Banking reported net income of $1.9 billion , down $911 million , or 32% , compared with the same period a year ago. Revenue was $11.8 billion for first quarter 2018 , stable compared with the same period last year, as higher net interest income, a gain on the sale of Pick-a-Pay loans, higher market sensitive revenue, and higher trust and investment fees, were offset by lower mortgage banking revenue and lower service charges on deposit accounts. Average loans of $470.5 billion in first quarter 2018 decreased $10.2 billion , or 2% , from first quarter 2017 . The decline in average loans was predominantly due to lower automobile loans and junior lien mortgages, partially offset by higher real estate 1-4 family first mortgages. Average deposits of $747.5 billion in first quarter 2018 increased $29.7 billion , or 4% , from first quarter 2017 . Primary consumer checking customers (customers who actively use their checking account with transactions such as debit card purchases, online

bill payments, and direct deposit) as of February 2018 were up 0.9% from February 2017. Noninterest expense increased $1.4 billion , or 20% , from first quarter 2017 . The increase in noninterest expense from first quarter 2017 was predominantly due to higher operating losses, including the $800 million discrete litigation accrual, and personnel expense. The provision for credit losses decreased $428 million from first quarter 2017 primarily reflecting an improvement in our outlook for 2017 hurricane-related losses, as well as continued improvement in residential real estate and lower loan balances.



14

Earnings Performance ( continued )





Wholesale Banking provides financial solutions to businesses across the United States and globally with annual sales generally in excess of $5 million. Products and businesses include Business Banking, Commercial Real Estate, Corporate Banking, Financial Institutions Group, Government and Institutional Banking,

Middle Market Banking, Principal Investments, Treasury Management, Wells Fargo Commercial Capital, and Wells Fargo Securities. Table 4b provides additional financial information for Wholesale Banking.

Table 4b: Wholesale Banking

Quarter ended March 31,

(in millions, except average balances which are in billions)

2018


2017


% Change


Net interest income

$

4,532


4,681


(3

)%

Noninterest income:

Service charges on deposit accounts

534


570


(6

)

Trust and investment fees:


Brokerage advisory, commissions and other fees

67


84


(20

)

Trust and investment management

113


129


(12

)

Investment banking

440


445


(1

)

Total trust and investment fees

620


658


(6

)

Card fees

87


80


9


Other fees

472


468


1


Mortgage banking

93


123


(24

)

Insurance

79


234


(66

)

Net gains from trading activities

225


290


(22

)

Net gains (losses) on debt securities

1


(66

)

102


Net gains from equity securities

93


36


158


Other income of the segment

543


503


8


Total noninterest income

2,747


2,896


(5

)


Total revenue

7,279


7,577


(4

)


Provision (reversal of provision) for credit losses

(20

)

(43

)

53


Noninterest expense:


Personnel expense

1,536


1,804


(15

)

Equipment

12


16


(25

)

Net occupancy

100


108


(7

)

Core deposit and other intangibles

95


105


(10

)

FDIC and other deposit assessments

122


118


3


Outside professional services

233


241


(3

)

Operating losses

8


6


33


Other expense of the segment

1,872


1,769


6


Total noninterest expense

3,978


4,167


(5

)

Income before income tax expense and noncontrolling interests

3,321


3,453


(4

)

Income tax expense

448


973


(54

)

Net loss from noncontrolling interests

(2

)

(5

)

60


Net income

$

2,875


2,485


16


Average loans

$

465.1


468.3


(1

)

Average deposits

446.0


465.3


(4

)

Wholesale Banking reported net income of $2.9 billion in first quarter 2018, up $390 million , or 16% , from the same period a year ago. First quarter 2018 results benefited from the reduced income tax rate. Revenue decreased $298 million , or 4% , from first quarter 2017 primarily due to the impact of the sale of Wells Fargo Insurance Services (WFIS) in fourth quarter 2017, as well as lower net interest income. Net interest income decreased $149 million , or 3% , from first quarter 2017 as lower average loan and deposit balances and lower income on tax advantaged products were partially offset by higher interest rates. Noninterest income decreased $149 million , or 5% , from first quarter 2017 as the impact of the sale of WFIS, lower mortgage banking fees, and lower operating lease income was partially offset by a gain on the sale of Wells Fargo Shareowner Services.

Average loans of $465.1 billion in first quarter 2018 decreased $3.2 billion , or 1% , from first quarter 2017 as lower commercial real estate was partially offset by growth in asset backed finance, capital finance, and commercial distribution finance. Average deposits of $446.0 billion decreased $19.3 billion , or 4% , from first quarter 2017 reflecting declines across many businesses as well as actions taken to comply with the asset cap included in the FRB consent order on February 2, 2018. Noninterest expense decreased $189 million , or 5% , from first quarter 2017 , reflecting the sale of WFIS, partially offset by higher regulatory, risk, cyber and technology expenses. The provision for credit losses increased $23 million from first quarter 2017 driven by a lower allowance for loan losses release.



15


Wealth and Investment Management provides a full range of personalized wealth management, investment and retirement products and services to clients across U.S. based businesses including Wells Fargo Advisors, The Private Bank, Abbot Downing, Wells Fargo Institutional Retirement and Trust, and Wells Fargo Asset Management. We deliver financial planning, private banking, credit, investment management and fiduciary services to high-net worth and ultra-high-net worth individuals

and families. We also serve clients' brokerage needs, supply retirement and trust services to institutional clients and provide investment management capabilities delivered to global institutional clients through separate accounts and the Wells Fargo Funds. Table 4c provides additional financial information for WIM.

Table 4c: Wealth and Investment Management

Quarter ended March 31,

(in millions, except average balances which are in billions)

2018


2017


% Change


Net interest income

$

1,112


1,141


(3

)%

Noninterest income:

Service charges on deposit accounts

4


5


(20

)

Trust and investment fees:

Brokerage advisory, commissions and other fees

2,344


2,245


4


Trust and investment management

743


707


5


Investment banking (1)

-


(1

)

100


Total trust and investment fees

3,087


2,951


5


Card fees

1


1


-


Other fees

4


5


(20

)

Mortgage banking

(3

)

(2

)

(50

)

Insurance

18


20


(10

)

Net gains from trading activities

19


34


(44

)

Net gains on debt securities

-


-


NM


Net gains from equity securities

6


66


(91

)

Other income of the segment

(6

)

36


NM


Total noninterest income

3,130


3,116


-


Total revenue

4,242


4,257


-


Provision (reversal of provision) for credit losses

(6

)

(4

)

(50

)

Noninterest expense:

Personnel expense

2,165


2,104


3


Equipment

10


11


(9

)

Net occupancy

109


107


2


Core deposit and other intangibles

69


72


(4

)

FDIC and other deposit assessments

36


40


(10

)

Outside professional services

198


222


(11

)

Operating losses

22


17


29


Other expense of the segment

681


631


8


Total noninterest expense

3,290


3,204


3


Income before income tax expense and noncontrolling interests

958


1,057


(9

)

Income tax expense

239


386


(38

)

Net income from noncontrolling interests

5


6


(17

)

Net income

$

714


665


7


Average loans

$

73.9


70.7


5


Average deposits

177.9


197.5


(10

)

NM – Not meaningful

(1)

Includes syndication and underwriting fees paid to Wells Fargo Securities which are offset in our Wholesale Banking segment.



WIM reported net income of $714 million in first quarter 2018, up $49 million , or 7% , compared with the same period a year ago. First quarter 2018 results benefited from the lower income tax rate. Revenue was down $15 million from first quarter 2017 , due to lower net interest income, partially offset by higher noninterest income. Net interest income decreased 3% from first quarter 2017 , primarily driven by lower deposit balances. Noninterest income increased $14 million from first quarter 2017 predominantly driven by higher asset-based fees, partially offset by deferred compensation plan investments (offset in employee benefits expense), and lower brokerage transaction revenue. Asset-based fees increased predominantly due to higher brokerage advisory account client assets driven by higher market valuations and positive net flows.

Average loans of $73.9 billion in first quarter 2018 increased 5% from the same period a year ago driven by growth in non-conforming mortgage loans. Average deposits in first quarter 2018 of $177.9 billion decreased 10% from the same period a year ago, as customers moved deposits into other investment alternatives. Noninterest expense was up 3% from first quarter 2017 , driven by higher broker commissions and higher project and technology spending on regulatory and compliance related initiatives, partially offset by lower deferred compensation plan expense (offset in net gains from equity securities). The provision for credit losses decreased $2 million from first quarter 2017 driven by lower net charge-offs.




16

Earnings Performance ( continued )





The following discussions provide additional information for client assets we oversee in our retail brokerage advisory and trust and investment management business lines.


Retail Brokerage Client Assets Brokerage advisory, commissions and other fees are received for providing full-service and discount brokerage services predominantly to retail brokerage clients. Offering advisory account relationships to our brokerage clients is an important component of our broader strategy of meeting their financial needs. Although a majority of our retail brokerage client assets are in accounts that earn

brokerage commissions, the fees from those accounts generally represent transactional commissions based on the number and size of transactions executed at the client's direction. Fees earned from advisory accounts are asset-based and depend on changes in the value of the client's assets as well as the level of assets resulting from inflows and outflows. A majority of our brokerage advisory, commissions and other fee income is earned from advisory accounts. Table 4d shows advisory account client assets as a percentage of total retail brokerage client assets at March 31, 2018 and 2017 .

Table 4d: Retail Brokerage Client Assets

March 31,

($ in billions)

2018


2017


Retail brokerage client assets

$

1,623.0


1,555.5


Advisory account client assets

540.4


490.1


Advisory account client assets as a percentage of total client assets

33

%

32


Retail Brokerage advisory accounts include assets that are financial advisor-directed and separately managed by third-party managers, as well as certain client-directed brokerage assets where we earn a fee for advisory and other services, but do not have investment discretion. These advisory accounts generate fees as a percentage of the market value of the assets, which vary across the account types based on the distinct services provided,

and are affected by investment performance as well as asset inflows and outflows. For the first quarter of 2018 and 2017 , the average fee rate by account type ranged from 80 to 120 basis points. Table 4e presents retail brokerage advisory account client assets activity by account type for the first quarter of 2018 and 2017 .

Table 4e: Retail Brokerage Advisory Account Client Assets

Quarter ended

(in billions)

Balance, beginning of period


Inflows (1)


Outflows (2)


Market impact (3)


Balance, end of period


March 31, 2018

Client directed (4)

$

170.9


9.4


(9.2

)

(2.7

)

168.4


Financial advisor directed (5)

147.0


8.1


(7.0

)

0.5


148.6


Separate accounts (6)

149.1


6.8


(7.3

)

(2.0

)

146.6


Mutual fund advisory (7)

75.8


4.0


(3.0

)

-


76.8


Total advisory client assets

542.8


28.3


(26.5

)

(4.2

)

540.4


March 31, 2017

Client directed (4)

159.1


12.0


(11.6

)

3.8


163.3


Financial advisor directed (5)

115.7


9.4


(6.0

)

7.1


126.2


Separate accounts (6)

125.7


8.2


(6.2

)

6.0


133.7


Mutual fund advisory (7)

63.3


3.8


(3.0

)

2.8


66.9


Total advisory client assets

463.8


33.4


(26.8

)

19.7


490.1


(1)

Inflows include new advisory account assets, contributions, dividends and interest.

(2)

Outflows include closed advisory account assets, withdrawals, and client management fees.

(3)

Market impact reflects gains and losses on portfolio investments.

(4)

Investment advice and other services are provided to client, but decisions are made by the client and the fees earned are based on a percentage of the advisory account assets, not the number and size of transactions executed by the client.

(5)

Professionally managed portfolios with fees earned based on respective strategies and as a percentage of certain client assets.

(6)

Professional advisory portfolios managed by Wells Fargo Asset Management or third-party asset managers. Fees are earned based on a percentage of certain client assets.

(7)

Program with portfolios constructed of load-waived, no-load and institutional share class mutual funds. Fees are earned based on a percentage of certain client assets.



17


Trust and Investment Client Assets Under Management We earn trust and investment management fees from managing and administering assets, including mutual funds, institutional separate accounts, personal trust, employee benefit trust and agency assets through our asset management, wealth and retirement businesses. Our asset management business is conducted by Wells Fargo Asset Management (WFAM), which offers Wells Fargo proprietary mutual funds and manages institutional separate accounts. Our wealth business manages

assets for high net worth clients, and our retirement business provides total retirement management, investments, and trust and custody solutions tailored to meet the needs of institutional clients. Substantially all of our trust and investment management fee income is earned from AUM where we have discretionary management authority over the investments and generate fees as a percentage of the market value of the AUM. Table 4f presents AUM activity for the first quarter of 2018 and 2017 .

Table 4f: WIM Trust and Investment – Assets Under Management

Quarter ended

(in billions)

Balance, beginning of period


Inflows (1)


Outflows (2)


Market impact (3)


Balance, end of period


March 31, 2018

Assets managed by WFAM (4):

Money market funds (5)

$

108.2


-


(3.2

)

-


105.0


Other assets managed

395.7


25.7


(29.2

)

(0.4

)

391.8


Assets managed by Wealth and Retirement (6)

186.2


10.4


(11.4

)

(1.9

)

183.3


Total assets under management

690.1


36.1


(43.8

)

(2.3

)

680.1


March 31, 2017

Assets managed by WFAM (4):

Money market funds (5)

102.6


-


(5.9

)

-


96.7


Other assets managed

379.6


29.4


(34.2

)

9.6


384.4


Assets managed by Wealth and Retirement (6)

168.5


9.4


(9.4

)

5.0


173.5


Total assets under management

650.7


38.8


(49.5

)

14.6


654.6


(1)

Inflows include new managed account assets, contributions, dividends and interest.

(2)

Outflows include closed managed account assets, withdrawals and client management fees.

(3)

Market impact reflects gains and losses on portfolio investments.

(4)

Assets managed by WFAM consist of equity, alternative, balanced, fixed income, money market, and stable value, and include client assets that are managed or sub-advised on behalf of other Wells Fargo lines of business.

(5)

Money Market funds activity is presented on a net inflow or net outflow basis, because the gross flows are not meaningful nor used by management as an indicator of performance.

(6)

Includes $5.7 billion and $6.3 billion as of March 31, 2018 and 2017 , respectively, of client assets invested in proprietary funds managed by WFAM.



18

Balance Sheet Analysis ( continued )


Balance Sheet Analysis 

At March 31, 2018 , our assets totaled $1.92 trillion , down $36.4 billion from December 31, 2017 . Asset decline was driven by declines in loans, federal funds sold, securities purchased under resale agreements and other short-term investments, and cash and due from banks, which decreased by $9.5 billion , $6.5 billion , and $5.2 billion , respectively, from December 31, 2017 . Total equity decreased by $2.2 billion from December 31, 2017 , predominantly due to a $2.8 billion decline in cumulative other comprehensive income and a $1.4 billion decline in

treasury stock, partially offset by a $2.7 billion increase in retained earnings net of dividends paid.

The following discussion provides additional information about the major components of our balance sheet. Information regarding our capital and changes in our asset mix is included in the "Earnings Performance – Net Interest Income" and "Capital Management" sections and Note 22 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.


Available-for-Sale and Held-to-Maturity Debt Securities

Table 5: Available-for-Sale and Held-to-Maturity Debt Securities

March 31, 2018

December 31, 2017

(in millions)

Amortized Cost


Net

 unrealized

gain (loss)


Fair value


Amortized Cost


Net

unrealized

gain (loss)


Fair value


Available-for-sale

273,588


(1,932

)

271,656


275,096


1,311


276,407


Held-to-maturity

141,446


(3,123

)

138,323


139,335


(350

)

138,985


Total (1)

$

415,034


(5,055

)

409,979


414,431


961


415,392


(1)

Available-for-sale debt securities are carried on the balance sheet at fair value. Held-to-maturity debt securities are carried on the balance sheet at amortized cost.

Table 5 presents a summary of our available-for-sale and held-to-maturity debt securities, which decreased $2.6 billion in balance sheet carrying value from December 31, 2017 , largely due to sales and paydowns of federal agency mortgage-backed securities, collateralized loan obligations and other asset-based securities, partially offset by purchases of federal agency mortgage-backed securities.

The total net unrealized losses on available-for-sale debt securities were $1.9 billion at March 31, 2018 , down from net unrealized gains of $1.3 billion at December 31, 2017 , primarily due to higher long-term interest rates. For a discussion of our investment management objectives and practices, see the "Balance Sheet Analysis" section in our 2017 Form 10-K. Also, see the "Risk Management – Asset/Liability Management" section in this Report for information on our use of investments to manage liquidity and interest rate risk.

We analyze debt securities for other-than-temporary impairment (OTTI) quarterly or more often if a potential loss-triggering event occurs. In first quarter 2018 , we recognized $10 million of OTTI write-downs on debt securities. For a discussion of our OTTI accounting policies and underlying considerations and analysis see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2017 Form 10-K and Note 5 (Debt Securities) to Financial Statements in this Report.

At March 31, 2018 , debt securities included $56.0 billion of municipal bonds, of which 95.7% were rated "A-" or better based largely on external and, in some cases, internal ratings. Additionally, some of the debt securities in our total municipal bond portfolio are guaranteed against loss by bond insurers. These guaranteed bonds are predominantly investment grade and were generally underwritten in accordance with our own investment standards prior to the determination to purchase, without relying on the bond insurer's guarantee in making the investment decision. The credit quality of our municipal bond holdings are monitored as part of our ongoing impairment analysis.

The weighted-average expected maturity of debt securities available-for-sale was 6.6 years at March 31, 2018 . The expected remaining maturity is shorter than the remaining contractual maturity for the 61% of this portfolio that is MBS because borrowers generally have the right to prepay obligations before the underlying mortgages mature. The estimated effects of a 200 basis point increase or decrease in interest rates on the fair value and the expected remaining maturity of the MBS available-for-sale portfolio are shown in Table 6 .

Table 6: Mortgage-Backed Securities Available for Sale

(in billions)

Fair value


Net unrealized gain (loss)


Expected remaining maturity

(in years)


At March 31, 2018

Actual

$

166.1


(3.1

)

6.4


Assuming a 200 basis point:

Increase in interest rates

147.3


(21.9

)

8.8


Decrease in interest rates

178.4


9.2


4.0


The weighted-average expected maturity of debt securities held-to-maturity was 6.4 years at March 31, 2018 . See Note 5 (Debt Securities) to Financial Statements in this Report for a summary of debt securities by security type.




19


Loan Portfolios

Table 7 provides a summary of total outstanding loans by portfolio segment. Total loans decreased $9.5 billion from December 31, 2017 , reflecting paydowns, sales of 1-4 family first mortgage PCI Pick-a-Pay loans, a continued decline in junior lien

mortgage loans, seasonal declines in credit card balances, reclassification of automobile loans of Reliable Financial Services, Inc. to loans held for sale, and an expected decline in automobile loans as the effect of tighter underwriting standards resulted in lower origination volume.

Table 7: Loan Portfolios

(in millions)

March 31, 2018


December 31, 2017


Commercial

$

503,396


503,388


Consumer

443,912


453,382


Total loans

$

947,308


956,770


Change from prior year-end

$

(9,462

)

(10,834

)


A discussion of average loan balances and a comparative detail of average loan balances is included in Table 1 under "Earnings Performance – Net Interest Income" earlier in this Report. Additional information on total loans outstanding by portfolio segment and class of financing receivable is included in the "Risk Management – Credit Risk Management" section in this Report. Period-end balances and other loan related

information are in Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report. 

Table 8 shows contractual loan maturities for loan categories normally not subject to regular periodic principal reduction and the contractual distribution of loans in those categories to changes in interest rates.

Table 8: Maturities for Selected Commercial Loan Categories

March 31, 2018

December 31, 2017

(in millions)

Within

one

 year


After one

year

through

five years


After

 five

years


Total


Within

one

year


After one

year

through

 five years


After

five

years


Total


Selected loan maturities:

Commercial and industrial

$

102,900


206,812


24,966


334,678


105,327


201,530


26,268


333,125


Real estate mortgage

18,326


64,889


42,328


125,543


20,069


64,384


42,146


126,599


Real estate construction

9,745


12,770


1,367


23,882


9,555


13,276


1,448


24,279


Total selected loans

$

130,971


284,471


68,661


484,103


134,951


279,190


69,862


484,003


Distribution of loans to changes in interest

rates:

Loans at fixed interest rates

$

16,698


29,202


26,906


72,806


18,587


30,049


26,748


75,384


Loans at floating/variable interest rates

114,273


255,269


41,755


411,297


116,364


249,141


43,114


408,619


Total selected loans

$

130,971


284,471


68,661


484,103


134,951


279,190


69,862


484,003




20

Balance Sheet Analysis ( continued )


Deposits

Deposits were $1.3 trillion at March 31, 2018 , down $32.3 billion from December 31, 2017 , due to a decrease in commercial deposits from financial institutions reflecting seasonal outflows and market-driven changes due to movements in interest rates, as well as actions to comply with the asset cap included in the consent order issued by the Board of Governors of the Federal

Reserve System on February 2, 2018. Table 9 provides additional information regarding deposits. Information regarding the impact of deposits on net interest income and a comparison of average deposit balances is provided in the "Earnings Performance – Net Interest Income" section and Table 1 earlier in this Report. 

Table 9: Deposits

($ in millions)

Mar 31,
2018


% of

total

deposits


Dec 31,
2017


% of
total
deposits



% Change


Noninterest-bearing

$

370,085


28

%

$

373,722


28

%

(1

)

Interest-bearing checking

95,123


7


51,928


4


83


Market rate and other savings

682,037


53


690,168


52


(1

)

Savings certificates

19,930


2


20,415


2


(2

)

Other time deposits

79,976


6


71,715


4


12


Deposits in foreign offices (1)

56,538


4


128,043


10


(56

)

Total deposits

$

1,303,689


100

%

$

1,335,991


100

%

(2

)

(1)

Includes Eurodollar sweep balances of $27.9 billion and $80.1 billion at March 31, 2018 , and December 31, 2017 , respectively.


Fair Value of Financial Instruments

We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. See the "Critical Accounting Policies" section in our 2017 Form 10-K and Note 15 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for a description of our critical accounting policy related to fair value of financial instruments and a discussion of our fair value measurement techniques.

Table 10 presents the summary of the fair value of financial instruments recorded at fair value on a recurring basis, and the amounts measured using significant Level 3 inputs (before derivative netting adjustments). The fair value of the remaining assets and liabilities were measured using valuation methodologies involving market-based or market-derived information (collectively Level 1 and 2 measurements).

Table 10: Fair Value Level 3 Summary

March 31, 2018

December 31, 2017

($ in billions)

Total

balance


Level 3 (1)


Total

balance


Level 3 (1)


Assets carried

at fair value

$

409.5


26.3


416.6


24.9


As a percentage

of total assets

21

%

1


21


1


Liabilities carried

at fair value

$

31.2


2.0


27.3


2.0


As a percentage of

total liabilities

2

%

*


2


*


* Less than 1%.

(1)

Before derivative netting adjustments.


See Note 15 (Fair Values of Assets and Liabilities) to Financial Statements in this Report for additional information on fair value measurements and a description of the Level 1, 2 and 3 fair value hierarchy.


Equity

Total equity was $205.9 billion at March 31, 2018 , compared with $208.1 billion at December 31, 2017 . The decrease was driven by a $2.8 billion decrease in cumulative other comprehensive income predominantly due to fair value adjustments to available-for-sale securities caused by an increase in long-term interest rates, and a $1.4 billion decrease in treasury stock, partially offset by a $2.7 billion increase in retained earnings net of dividends paid.



21



Off-Balance Sheet Arrangements

In the ordinary course of business, we engage in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different from the full contract or notional amount of the transaction. Our off-balance sheet arrangements include commitments to lend and purchase debt and equity securities, transactions with unconsolidated entities, guarantees, derivatives, and other commitments. These transactions are designed to (1) meet the financial needs of customers, (2) manage our credit, market or liquidity risks, and/or (3) diversify our funding sources.

Commitments to Lend and Purchase Debt and Equity Securities

We enter into commitments to lend funds to customers, which are usually at a stated interest rate, if funded, and for specific purposes and time periods. When we make commitments, we are exposed to credit risk. However, the maximum credit risk for these commitments will generally be lower than the contractual amount because a significant portion of these commitments is expected to expire without being used by the customer. For more information on lending commitments, see Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report. We also enter into commitments to purchase securities under resale agreements. For more information on commitments to purchase securities under resale agreements, see Note 12 (Guarantees, Pledged Assets and Collateral, and Other Commitments) to Financial Statements in this Report. We also may enter into commitments to purchase debt and equity securities to provide capital for customers' funding, liquidity or other future needs. For more information, see the "Off-Balance Sheet Arrangements – Contractual Cash Obligations" section in our 2017 Form 10-K and Note 12 (Guarantees, Pledged Assets and Collateral, and Other Commitments) to Financial Statements in this Report.

Transactions with Unconsolidated Entities

In the normal course of business, we enter into various types of on- and off-balance sheet transactions with special purpose entities (SPEs), which are corporations, trusts, limited liability companies or partnerships that are established for a limited purpose. Generally, SPEs are formed in connection with securitization transactions and are considered variable interest entities (VIEs). For more information on securitizations, including sales proceeds and cash flows from securitizations, see Note 9 (Securitizations and Variable Interest Entities) to Financial Statements in this Report.

Guarantees and Certain Contingent Arrangements

Guarantees are contracts that contingently require us to make payments to a guaranteed party based on an event or a change in an underlying asset, liability, rate or index. Guarantees are generally in the form of standby letters of credit, securities lending and other indemnifications, written put options, recourse obligations and other types of arrangements. For more information on guarantees and certain contingent arrangements, see Note 12 (Guarantees, Pledged Assets and Collateral, and Other Commitments) to Financial Statements in this Report.


Derivatives

We use derivatives to manage exposure to market risk, including interest rate risk, credit risk and foreign currency risk, and to assist customers with their risk management objectives. Derivatives are recorded on the balance sheet at fair value, and volume can be measured in terms of the notional amount, which is generally not exchanged but is used only as the basis on which interest and other payments are determined. The notional amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. For more information on derivatives, see Note 14 (Derivatives) to Financial Statements in this Report.

Other Commitments

We also have other off-balance sheet transactions, including obligations to make rental payments under noncancelable operating leases. Our operating lease obligations are discussed in Note 7 (Premises, Equipment, Lease Commitments and Other Assets) to Financial Statements in our 2017 Form 10-K.



22


Risk Management

Wells Fargo manages a variety of risks that can significantly affect our financial performance and our ability to meet the expectations of our customers, stockholders, regulators and other stakeholders. Among the significant risks that we manage are conduct risk, operational risk, compliance risk, credit risk, and asset/liability management related risks, which include interest rate risk, market risk, liquidity risk, and funding related risks. We operate under a Board-level approved risk framework which outlines our company-wide approach to risk management and oversight, and describes the structures and practices employed to manage current and emerging risks inherent to Wells Fargo. For more information about how we manage these risks, see the "Risk Management" section in our 2017 Form 10-K. The discussion that follows provides an update regarding these risks.

Conduct Risk Management

Conduct risk is the risk resulting from behavior that does not

comply with the Company's values or ethical principles.

Our Board has enhanced its oversight of conduct risk to

oversee the alignment of team member conduct to the

Company's risk appetite (which the Board approves annually)

and culture as reflected in our Vision, Values and Goals and

Code of Ethics and Business Conduct. The Board's Risk

Committee has primary oversight responsibility for company- wide conduct risk, while certain other Board committees have

primary oversight responsibility for specific components of

conduct risk. For example, the conduct risk oversight

responsibilities of the Board's Human Resources Committee

include the Company's human capital management, company-wide culture, the Ethics Oversight program (including the

Company's Code of Ethics and Business Conduct), and oversight

of our company-wide incentive compensation risk management

program.

At the management level, the Conduct Management

Office has primary oversight responsibility for key elements of

conduct risk, including internal investigations, sales practices

oversight, complaints oversight, and ethics oversight. This office

reports and is accountable to the Chief Risk Officer (CRO) and the Enterprise Risk Management Committee and also has direct escalation and informational reporting paths to the relevant Board committees.


Operational Risk Management

Operational risk is the risk resulting from inadequate or failed

internal controls and processes, people and systems, or resulting

from external events. Operational risk is inherent in all Wells

Fargo products and services as it often arises in the presence of

other risk types.

The Board's Risk Committee has primary oversight

responsibility for all aspects of operational risk. In this capacity,

it reviews and approves significant supporting operational risk

policies and programs, including the Company's business

continuity, financial crimes, information security, privacy,

technology, and third-party risk management policies and

programs. In addition, it periodically reviews updates from

management on the overall state of operational risk, including

all related programs and risk types.

At the management level, the Operational Risk Group has

primary oversight responsibility for operational risk. This group

reports and is accountable to the CRO and the Enterprise Risk

Management Committee, and existing management-level

committees with primary oversight responsibility for key

elements of operational risk report to it while maintaining

relevant dual escalation and informational reporting paths to

Board-level committees.

Information security is a significant operational risk for

financial institutions such as Wells Fargo, and includes the risk

of losses resulting from cyber attacks. Our Board is actively engaged in the oversight of our Company's information security risk management and cyber defense programs. The Board's Risk Committee has primary oversight responsibility for information security and receives regular updates and reporting from management on information and cyber security matters, including information related to any third-party assessments of the Company's cyber program. In addition, the Risk Committee annually approves the Company's information security program, which includes the cyber defense program and information security policy. In 2017, the Risk Committee also formed a Technology Subcommittee to provide focused oversight of technology, information security and cyber risks as well as data governance and management. The Technology Subcommittee reports to the Risk Committee and updates are provided by the Risk Committee to the full Board.

Wells Fargo and other financial institutions continue to be the target of various evolving and adaptive cyber attacks, including malware and denial-of-service, as part of an effort to disrupt the operations of financial institutions, potentially test their cybersecurity capabilities, commit fraud, or obtain confidential, proprietary or other information. Cyber attacks have also focused on targeting online applications and services, such as online banking, and have targeted the infrastructure of the internet causing the widespread unavailability of websites and degrading website performance. Wells Fargo has not experienced any material losses relating to these or other cyber attacks. Addressing cybersecurity risks is a priority for Wells Fargo, and we continue to develop and enhance our controls, processes and systems in order to protect our networks, computers, software and data from attack, damage or unauthorized access. We are also proactively involved in industry cybersecurity efforts and working with other parties, including our third-party service providers and governmental agencies, to continue to enhance defenses and improve resiliency to cybersecurity threats. See the "Risk Factors" section in our 2017 Form 10-K for additional information regarding the risks associated with a failure or breach of our operational or security systems or infrastructure, including as a result of cyber attacks.


Compliance Risk Management

Compliance risk is the risk resulting from the failure to comply with applicable laws, regulations, rules, or other regulatory requirements, or the failure to appropriately address and limit violations of law and any associated harm to customers. Compliance risk encompasses compliance with the applicable standards of self-regulatory organizations as well as with internal policies and procedures.

The Board's Risk Committee has primary oversight responsibility for compliance risk. In 2017, the Risk Committee also formed a Compliance Subcommittee to provide focused oversight of compliance risk. The Compliance Subcommittee reports to the Risk Committee and updates are provided by the Risk Committee to the full Board.

At the management level, Wells Fargo Compliance has primary oversight responsibility for compliance risk. This management-level organization reports and is accountable to the


23


CRO and the Enterprise Risk Management Committee and also has a direct escalation and information reporting path to the Board's Risk Committee. We continue to enhance our oversight of operational and compliance risk management, including as required by the FRB's February 2, 2018, and the CFPB/OCC's April 20, 2018, consent orders.


Credit Risk Management

We define credit risk as the risk of loss associated with a borrower or counterparty default (failure to meet obligations in accordance with agreed upon terms). Credit risk exists with many of our assets and exposures such as debt security holdings, certain derivatives, and loans. The following discussion focuses on our loan portfolios, which represent the largest component of assets on our balance sheet for which we have credit risk.  Table 11 presents our total loans outstanding by portfolio segment and class of financing receivable.

Table 11: Total Loans Outstanding by Portfolio Segment and Class of Financing Receivable

(in millions)

Mar 31, 2018


Dec 31, 2017


Commercial:

Commercial and industrial

$

334,678


333,125


Real estate mortgage

125,543


126,599


Real estate construction

23,882


24,279


Lease financing

19,293


19,385


Total commercial

503,396


503,388


Consumer:

Real estate 1-4 family first mortgage

282,658


284,054


Real estate 1-4 family junior lien mortgage

37,920


39,713


Credit card

36,103


37,976


Automobile

49,554


53,371


Other revolving credit and installment

37,677


38,268


Total consumer

443,912


453,382


Total loans

$

947,308


956,770



We manage our credit risk by establishing what we believe are sound credit policies for underwriting new business, while monitoring and reviewing the performance of our existing loan portfolios. We employ various credit risk management and monitoring activities to mitigate risks associated with multiple risk factors affecting loans we hold, could acquire or originate including:

Loan concentrations and related credit quality

Counterparty credit risk

Economic and market conditions

Legislative or regulatory mandates

Changes in interest rates

Merger and acquisition activities

Reputation risk


Our credit risk management oversight process is governed centrally, but provides for decentralized management and accountability by our lines of business. Our overall credit process includes comprehensive credit policies, disciplined credit underwriting, frequent and detailed risk measurement and modeling, extensive credit training programs, and a continual loan review and audit process.

A key to our credit risk management is adherence to a well-controlled underwriting process, which we believe is appropriate

for the needs of our customers as well as investors who purchase the loans or securities collateralized by the loans.

Credit Quality Overview Solid credit quality continued in first quarter 2018 , as our net charge-off rate remained low at 0.32% (annualized) of average total loans. We continued to benefit from improvements in the performance of our residential real estate portfolio as well as reduced losses in our oil and gas portfolio. In particular:

Nonaccrual loans were $7.7 billion at March 31, 2018 , down from $8.0 billion at December 31, 2017 . Commercial nonaccrual loans declined to $2.4 billion at March 31, 2018 , compared with $2.6 billion at December 31, 2017 , and consumer nonaccrual loans declined to $5.3 billion at March 31, 2018 , compared with $5.4 billion at December 31, 2017 . The decline in nonaccrual loans reflected an improved housing market and continued improvement in our oil and gas portfolio. Nonaccrual loans represented 0.81% of total loans at March 31, 2018 , compared with 0.84% at December 31, 2017 .

Net charge-offs (annualized) as a percentage of average total loans decreased to 0.32% in first quarter 2018 , compared with 0.34% a year ago. Net charge-offs (annualized) as a percentage of our average commercial and consumer portfolios were 0.06% and 0.60% in first quarter 2018 , respectively, compared with 0.11% and 0.59% in first quarter 2017 .

Loans that are not government insured/guaranteed and 90 days or more past due and still accruing were $64 million and $903 million in our commercial and consumer portfolios, respectively, at March 31, 2018 , compared with $49 million and $1.0 billion at December 31, 2017 .

Our provision for credit losses was $191 million in first quarter 2018 , compared with $605 million for the same period a year ago.

The allowance for credit losses totaled $11.3 billion , or 1.19% of total loans, at March 31, 2018 , down from $12.0 billion , or 1.25% , at December 31, 2017 .


Additional information on our loan portfolios and our credit quality trends follows.


PURCHASED CREDIT-IMPAIRED (PCI) LOANS Loans acquired with evidence of credit deterioration since their origination and where it is probable that we will not collect all contractually required principal and interest payments are PCI loans. Substantially all of our PCI loans were acquired in the Wachovia acquisition on December 31, 2008. PCI loans are recorded at fair value at the date of acquisition, and the historical allowance for credit losses related to these loans is not carried over. The carrying value of PCI loans at March 31, 2018 , totaled $10.7 billion , compared with $12.8 billion at December 31, 2017 , and $58.8 billion at December 31, 2008. The decrease from December 31, 2017, was due in part to prepayments observed in our Pick-a-Pay PCI portfolio, as well as the sale of $1.6 billion of Pick-a-Pay PCI loans. PCI loans are considered to be accruing due to the existence of the accretable yield amount, which represents the cash expected to be collected in excess of their carrying value, and not based on consideration given to contractual interest payments. The accretable yield at March 31, 2018 , was $6.9 billion .

A nonaccretable difference is established for PCI loans to absorb losses expected on the contractual amounts of those loans in excess of the fair value recorded at the date of acquisition. Amounts absorbed by the nonaccretable difference do not affect


24


the income statement or the allowance for credit losses. At March 31, 2018 , $293 million in nonaccretable difference remained to absorb losses on PCI loans.

For additional information on PCI loans, see the "Risk Management – Credit Risk Management – Real Estate 1-4 Family First and Junior Lien Mortgage Loans – Pick-a-Pay Portfolio" section in this Report, Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2017 Form 10-K, and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.


Significant Loan Portfolio Reviews Measuring and monitoring our credit risk is an ongoing process that tracks delinquencies, collateral values, Fair Isaac Corporation (FICO) scores, economic trends by geographic areas, loan-level risk grading for certain portfolios (typically commercial) and other indications of credit risk. Our credit risk monitoring process is designed to enable early identification of developing risk and to support our determination of an appropriate allowance for credit losses. The following discussion provides additional characteristics and analysis of our significant portfolios. See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for more analysis and credit metric information for each of the following portfolios.


COMMERCIAL AND INDUSTRIAL LOANS AND LEASE FINANCING For purposes of portfolio risk management, we aggregate commercial and industrial loans and lease financing according to market segmentation and standard industry codes. We generally subject commercial and industrial loans and lease financing to individual risk assessment using our internal borrower and collateral quality ratings. Our ratings are aligned to regulatory definitions of pass and criticized categories with criticized divided between special mention, substandard, doubtful and loss categories.

The commercial and industrial loans and lease financing portfolio totaled $354.0 billion , or 37% of total loans, at March 31, 2018 . The annualized net charge-off rate for this portfolio was 0.11% in first quarter 2018 , compared with 0.20% in first quarter 2017. At March 31, 2018 , 0.45% of this portfolio was nonaccruing, compared with 0.56% at December 31, 2017 , reflecting a decrease of $366 million in nonaccrual loans, mostly due to improvement in the oil and gas portfolio. Also, $17.5 billion of the commercial and industrial loan and lease financing portfolio was internally classified as criticized in accordance with regulatory guidance at March 31, 2018 , compared with $17.9 billion at December 31, 2017 . The decrease in criticized loans, which also includes the decrease in nonaccrual loans, was predominantly due to improvement in the oil and gas portfolio.

Most of our commercial and industrial loans and lease financing portfolio is secured by short-term assets, such as accounts receivable, inventory and debt securities, as well as long-lived assets, such as equipment and other business assets. Generally, the collateral securing this portfolio represents a secondary source of repayment.

Table 12 provides a breakout of commercial and industrial loans and lease financing by industry, and includes $60.8 billion of foreign loans at March 31, 2018 . Foreign loans totaled $18.4 billion within the investor category, $17.4 billion within the financial institutions category and $1.5 billion within the oil and gas category.

The investors category includes loans to special purpose vehicles (SPVs) formed by sponsoring entities to invest in financial assets backed predominantly by commercial and residential real estate or corporate cash flow, and are repaid from the asset cash flows or the sale of assets by the SPV. We limit loan amounts to a percentage of the value of the underlying assets, as determined by us, based on analysis of underlying credit risk and other factors such as asset duration and ongoing performance.

We provide financial institutions with a variety of relationship focused products and services, including loans supporting short-term trade finance and working capital needs. The $17.4 billion of foreign loans in the financial institutions category were predominantly originated by our Financial Institutions business.

The oil and gas loan portfolio totaled $12.2 billion , or 1% of total outstanding loans, at March 31, 2018 , compared with $12.5 billion , or 1% of total outstanding loans, at December 31, 2017 . Oil and gas nonaccrual loans decreased to $823 million at March 31, 2018 , compared with $1.1 billion at December 31, 2017 , due to improved portfolio performance.

Table 12: Commercial and Industrial Loans and Lease Financing by Industry (1)

March 31, 2018

(in millions)

Nonaccrual

loans


Total

portfolio


(2)

% of

total

loans


Investors

$

11


61,921


7

%

Financial institutions

2


38,837


4


Cyclical retailers

71


27,934


3


Healthcare

48


17,177


2


Food and beverage

7


16,925


2


Industrial equipment

107


14,555


2


Real estate lessor

7


14,532


2


Technology

29


13,535


1


Oil and gas

823


12,223


1


Transportation

117


8,785


1


Business services

34


8,638


1


Public administration

9


8,297


1


Other

344


110,612


(3)

10


Total

$

1,609


353,971


37

%

(1)

Industry categories are based on the North American Industry Classification System and the amounts reported include foreign loans. See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for a breakout of commercial foreign loans.

(2)

Includes $75 million of PCI loans, which are considered to be accruing due to the existence of the accretable yield and not based on consideration given to contractual interest payments.

(3)

No other single industry had total loans in excess of $6.6 billion . 


25


COMMERCIAL REAL ESTATE (CRE) We generally subject CRE loans to individual risk assessment using our internal borrower and collateral quality ratings. Our ratings are aligned to regulatory definitions of pass and criticized categories with criticized divided among special mention, substandard, doubtful and loss categories. The CRE portfolio, which included $8.8 billion of foreign CRE loans, totaled $149.4 billion , or 16% of total loans, at March 31, 2018 , and consisted of $125.5 billion of mortgage loans and $23.9 billion of construction loans.

Table 13 summarizes CRE loans by state and property type with the related nonaccrual totals. The portfolio is diversified both geographically and by property type. The largest geographic

concentrations of CRE loans are in California, New York, Texas and Florida, which combined represented 49% of the total CRE portfolio. By property type, the largest concentrations are office buildings at 28% and apartments at 15% of the portfolio. CRE nonaccrual loans totaled 0.5% of the CRE outstanding balance at March 31, 2018 , compared with 0.4% at December 31, 2017 . At March 31, 2018 , we had $4.4 billion of criticized CRE mortgage loans, compared with $4.3 billion at December 31, 2017 , and $235 million of criticized CRE construction loans, compared with $298 million at December 31, 2017 .


Table 13: CRE Loans by State and Property Type

March 31, 2018

Real estate mortgage

Real estate construction

Total

(in millions)

Nonaccrual

loans


Total

portfolio


Nonaccrual

loans


Total

portfolio


Nonaccrual

loans


Total

portfolio


% of

total

loans


By state:

California

$

145


35,507


7


4,254


152


39,761


4

%

New York

12


10,143


-


2,313


12


12,456


1


Texas

211


8,684


-


2,158


211


10,842


1


Florida

43


7,882


2


2,138


45


10,020


1


Arizona

26


4,394


-


533


26


4,927


1


North Carolina

23


3,861


6


855


29


4,716


*


Georgia

15


3,765


1


858


16


4,623


*


Illinois

5


3,552


-


530


5


4,082


*


Virginia

12


3,121


-


891


12


4,012


*


Washington

25


3,085


3


625


28


3,710


*


Other

238


41,549


26


8,727


264


50,276


(1)

5


Total

$

755


125,543


45


23,882


800


149,425


16

%

By property:

Office buildings

$

130


38,431


5


3,199


135


41,630


4

%

Apartments

17


14,937


-


7,968


17


22,905


2


Industrial/warehouse

141


16,063


5


1,990


146


18,053


2


Retail (excluding shopping center)

84


16,289


1


674


85


16,963


2


Shopping center

11


11,726


-


1,369


11


13,095


1


Hotel/motel

20


9,236


-


1,917


20


11,153


1


Mixed use properties (2)

209


6,556


2


170


211


6,726


1


Institutional

59


3,360


-


1,785


59


5,145


1


Agriculture

33


2,517


-


20


33


2,537


*


1-4 family structure

-


10


12


2,306


12


2,316


*


Other

51


6,418


20


2,484


71


8,902


1


Total

$

755


125,543


45


23,882


800


149,425


16

%

*

Less than 1%.

(1) Includes 40 states; no state had loans in excess of $3.5 billion .

(2)

Mixed use properties are primarily owner occupied real estate, including data centers, flexible space leased to multiple tenants, light manufacturing and other specialized use properties.



26

Risk Management - Credit Risk Management (continued)


FOREIGN LOANS AND COUNTRY RISK EXPOSURE We classify loans for financial statement and certain regulatory purposes as foreign primarily based on whether the borrower's primary address is outside of the United States. At March 31, 2018 , foreign loans totaled $70.0 billion , representing approximately 7% of our total consolidated loans outstanding, compared with $70.4 billion , or approximately 7% of total consolidated loans outstanding, at December 31, 2017 . Foreign loans were approximately 4%  of our consolidated total assets at March 31, 2018 and at December 31, 2017 .

Our country risk monitoring process incorporates frequent dialogue with our financial institution customers, counterparties and regulatory agencies, enhanced by centralized monitoring of macroeconomic and capital markets conditions in the respective countries. We establish exposure limits for each country through a centralized oversight process based on customer needs, and in consideration of relevant economic, political, social, legal, and transfer risks. We monitor exposures closely and adjust our country limits in response to changing conditions.

We evaluate our individual country risk exposure based on our assessment of the borrower's ability to repay, which gives consideration for allowable transfers of risk such as guarantees and collateral and may be different from the reporting based on the borrower's primary address. Our largest single foreign country exposure based on our assessment of risk at March 31, 2018 , was the United Kingdom, which totaled $29.1 billion , or approximately 2% of our total assets, and included $3.3 billion of sovereign claims. Our United Kingdom sovereign claims arise predominantly from deposits we have placed with the Bank of England pursuant to regulatory requirements in support of our London branch. The United Kingdom officially announced its intention to leave the European Union (Brexit) on March 29, 2017, starting the two-year negotiation process leading to its departure. We continue to conduct assessments and are executing our implementation plans to ensure we can continue to prudently serve our customers post-Brexit.

Table 14 provides information regarding our top 20 exposures by country (excluding the U.S.) and our Eurozone exposure, based on our assessment of risk, which gives consideration to the country of any guarantors and/or underlying collateral. Our exposure to Puerto Rico (considered part of U.S. exposure) is primarily through automobile lending and was not material to our consolidated country exposure. In first quarter 2018, we entered into an agreement to sell certain assets and liabilities of our automobile financing business in Puerto Rico, which is expected to close in second quarter 2018. For additional information, see the "Risk Management – Credit Risk Management – Automobile" section in this Report.



27


Table 14: Select Country Exposures

March 31, 2018

Lending (1)

Securities (2)

Derivatives and other (3)

Total exposure

(in millions)

Sovereign


Non-

sovereign


Sovereign


Non-

sovereign


Sovereign


Non-

sovereign


Sovereign


Non-

sovereign (4)


Total


Top 20 country exposures:

United Kingdom

$

3,305


22,087


-


1,807


-


1,887


3,305


25,781


29,086


Canada

30


17,523


178


276


-


517


208


18,316


18,524


Cayman Islands

-


5,757


-


-


-


278


-


6,035


6,035


Germany

2,841


1,871


180


7


14


357


3,035


2,235


5,270


Ireland

-


3,918


-


96


-


192


-


4,206


4,206


Bermuda

-


3,410


-


80


-


198


-


3,688


3,688


China

-


3,173


(3

)

185


19


50


16


3,408


3,424


Netherlands

-


2,382


-


559


-


264


-


3,205


3,205


India

-


2,314


-


50


-


-


-


2,364


2,364


Luxembourg

-


1,069


-


742


-


196


-


2,007


2,007


Brazil

-


1,605


(1

)

23


-


11


(1

)

1,639


1,638


Guernsey

-


1,626


-


8


-


4


-


1,638


1,638


Australia

-


1,413


-


51


-


62


-


1,526


1,526


Switzerland

-


1,314


-


(21

)

-


26


-


1,319


1,319


Chile

-


1,313


-


(5

)

-


-


-


1,308


1,308


France

-


988


-


138


-


139


-


1,265


1,265


Japan

149


1,010


5


13


1


39


155


1,062


1,217


Virgin Islands (British)

-


1,148


-


48


-


-


-


1,196


1,196


South Korea

-


1,098


(3

)

80


1


7


(2

)

1,185


1,183


Jersey, Channel Islands

-


570


-


455


-


8


-


1,033


1,033


Total top 20 country exposures

$

6,325


75,589


356


4,592


35


4,235


6,716


84,416


91,132


Eurozone exposure:

Eurozone countries included in Top 20 above (5)

$

2,841


10,228


180


1,542


14


1,148


3,035


12,918


15,953


Austria

-


594


-


21


-


2


-


617


617


Spain

-


409


-


35


-


27


-


471


471


Belgium

-


351


-


(69

)

-


6


-


288


288


Other Eurozone exposure (6)

25


298


-


54


-


-


25


352


377


Total Eurozone exposure

$

2,866


11,880


180


1,583


14


1,183


3,060


14,646


17,706


(1)

Lending exposure includes funded loans and unfunded commitments, leveraged leases, and money market placements presented on a gross basis prior to the deduction of impairment allowance and collateral received under the terms of the credit agreements. For the countries listed above, there are $561 million in defeased leases secured significantly by U.S. Treasury and government agency securities.

(2)

Represents exposure on debt and equity securities of foreign issuers. Long and short positions are netted and net short positions are reflected as negative exposure.

(3)

Represents counterparty exposure on foreign exchange and derivative contracts, and securities resale and lending agreements. This exposure is presented net of counterparty netting adjustments and reduced by the amount of cash collateral. It includes credit default swaps (CDS) predominantly used for market making activities in the U.S. and London based trading businesses, which sometimes results in selling and purchasing protection on the identical reference entities. Generally, we do not use market instruments such as CDS to hedge the credit risk of our investment or loan positions, although we do use them to manage risk in our trading businesses At March 31, 2018 , the gross notional amount of our CDS sold that reference assets in the Top 20 or Eurozone countries was $355 million , which was offset by the notional amount of CDS purchased of $472 million . We did not have any CDS purchased or sold that reference pools of assets that contain sovereign debt or where the reference asset was solely the sovereign debt of a foreign country.

(4)

For countries presented in the table, total non-sovereign exposure comprises $42.0 billion exposure to financial institutions and $44.1 billion to non-financial corporations at March 31, 2018 .

(5)

Consists of exposure to Germany, Ireland, Netherlands, Luxembourg, and France included in Top 20.

(6)

Includes non-sovereign exposure to Italy, Portugal, and Greece in the amount of $154 million , $23 million and $3 million , respectively. We had no sovereign debt exposure to Portugal and Greece, and the sovereign exposure to Italy was immaterial at March 31, 2018 .


28

Risk Management - Credit Risk Management (continued)


REAL ESTATE 1-4 FAMILY FIRST AND JUNIOR LIEN MORTGAGE LOANS Our real estate 1-4 family first and junior lien mortgage loans, as presented in Table 15 , include loans we have made to customers and retained as part of our asset/liability management strategy, the Pick-a-Pay portfolio acquired from

Wachovia which is discussed later in this Report and other purchased loans, and loans included on our balance sheet as a result of consolidation of variable interest entities (VIEs).

Table 15: Real Estate 1-4 Family First and Junior Lien Mortgage Loans

March 31, 2018

December 31, 2017

(in millions)

Balance


% of

portfolio


Balance


% of

portfolio


Real estate 1-4 family first mortgage

$

282,658


88

%

$

284,054


88

%

Real estate 1-4 family junior lien mortgage

37,920


12


39,713


12


Total real estate 1-4 family mortgage loans

$

320,578


100

%

$

323,767


100

%


The real estate 1-4 family mortgage loan portfolio includes some loans with adjustable-rate features and some with an interest-only feature as part of the loan terms. Interest-only loans were approximately 4% of total loans at both March 31, 2018 , and December 31, 2017 . We believe we have manageable adjustable-rate mortgage (ARM) reset risk across our owned mortgage loan portfolios. We do not offer option ARM products, nor do we offer variable-rate mortgage products with fixed payment amounts, commonly referred to within the financial services industry as negative amortizing mortgage loans. The option ARMs we do have are included in the Pick-a-Pay portfolio which was acquired from Wachovia. Since our acquisition of the Pick-a-Pay loan portfolio at the end of 2008, the option payment portion of the portfolio has reduced from 86% to 39% at March 31, 2018 , as a result of our modification and loss mitigation efforts. For more information, see the "Pick-a-Pay Portfolio" section in this Report.

We continue to modify real estate 1-4 family mortgage loans to assist homeowners and other borrowers experiencing financial difficulties. For more information on our modification programs, see the "Risk Management – Credit Risk Management – Real Estate 1-4 Family First and Junior Lien Mortgage Loans" section in our 2017 Form 10-K.

Part of our credit monitoring includes tracking delinquency, current FICO scores and loan/combined loan to collateral values (LTV/CLTV) on the entire real estate 1-4 family mortgage loan portfolio. These credit risk indicators, which exclude government insured/guaranteed loans, continued to improve in first quarter 2018 on the non-PCI mortgage portfolio. Loans 30 days or more delinquent at March 31, 2018 , totaled $4.6 billion , or 1% of total non-PCI mortgages, compared with $5.3 billion , or 2% , at December 31, 2017 . Loans with FICO scores lower than 640 totaled $10.9 billion , or 4% of total non-PCI mortgages at March 31, 2018 , compared with $11.7 billion , or 4% , at December 31, 2017 . Mortgages with a LTV/CLTV greater than 100% totaled $5.6 billion at March 31, 2018 , or 2% of total non-PCI mortgages, compared with $6.1 billion , or 2% , at December 31, 2017 . Information regarding credit quality indicators, including PCI credit quality indicators, can be found in Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

Real estate 1-4 family first and junior lien mortgage loans by state are presented in Table 16 . Our real estate 1-4 family non-PCI mortgage loans to borrowers in California represented 12% of total loans at March 31, 2018 , located mostly within the larger metropolitan areas, with no single California metropolitan area consisting of more than 4% of total loans. We monitor changes in real estate values and underlying economic or market conditions for all geographic areas of our real estate 1-4 family first and junior lien mortgage portfolios as part of our credit risk management process. Our underwriting and periodic review of

loans and lines secured by residential real estate collateral includes appraisals or estimates from automated valuation models (AVMs) to support property values. Additional information about AVMs and our policy for their use can be found in Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report and the "Risk Management – Credit Risk Management – Real Estate 1-4 Family First and Junior Lien Mortgage Loans" section in our 2017 Form 10-K.

Table 16: Real Estate 1-4 Family First and Junior Lien Mortgage Loans by State

March 31, 2018

(in millions)

Real estate

1-4 family

first

mortgage


Real estate

1-4 family

junior lien

mortgage


Total real

estate 1-4

family

mortgage


% of

total

loans


Real estate 1-4 family loans (excluding PCI):

California

$

102,526


10,092


112,618


12

%

New York

27,275


1,876


29,151


3


New Jersey

13,210


3,478


16,688


2


Florida

12,868


3,531


16,399


2


Virginia

7,941


2,258


10,199


1


Washington

8,952


812


9,764


1


Texas

8,626


698


9,324


1


North Carolina

5,979


1,782


7,761


1


Pennsylvania

5,551


2,125


7,676


1


Other (1)

64,326


11,243


75,569


8


Government insured/

guaranteed loans (2)

14,795


-


14,795


1


Real estate 1-4 family loans (excluding PCI)

272,049


37,895


309,944


33


Real estate 1-4 family PCI loans

10,609


25


10,634


1


Total

$

282,658


37,920


320,578


34

%

(1)

Consists of 41 states; no state had loans in excess of $6.7 billion .

(2)

Represents loans whose repayments are predominantly insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA).




29


First Lien Mortgage Portfolio Our total real estate 1-4 family first lien mortgage portfolio decreased $1.4 billion in first quarter 2018 , due to sales of Pick-a-Pay PCI loans, partially offset by non-conforming loan growth. We retained $8.4 billion in non-conforming originations, consisting of loans that exceed conventional conforming loan amount limits established by federal government-sponsored entities (GSEs) in first quarter 2018 .

The credit performance associated with our real estate 1-4 family first lien mortgage portfolio continued to improve in first quarter 2018 , as measured through net charge-offs and nonaccrual loans. Net charge-offs (annualized) as a percentage of average real estate 1-4 family first lien mortgage loans improved

to a net recovery of 0.03% in first quarter 2018 , compared with a net charge-off of 0.01% for the same period a year ago. Nonaccrual loans were $4.1 billion at March 31, 2018 , down $69 million from December 31, 2017 . Improvement in the credit performance was driven by an improving housing environment. Real estate 1-4 family first lien mortgage loans originated after 2008, which generally utilized tighter underwriting standards, comprised approximately 80% of our total real estate 1-4 family first lien mortgage portfolio as of March 31, 2018 .

Table 17 shows certain delinquency and loss information for the first lien mortgage portfolio and lists the top five states by outstanding balance.

Table 17: First Lien Mortgage Portfolio Performance

Outstanding balance

% of loans 30 days or more past due

Loss (recovery) rate (annualized) quarter ended

(in millions)

Mar 31,
2018


Dec 31,
2017


Mar 31,
2018


Dec 31,
2017

Mar 31,
2018


Dec 31,
2017


Sep 30,
2017


Jun 30,
2017


Mar 31,
2017


California

$

102,526


101,464


0.81

%

1.06

(0.07

)

(0.05

)

(0.09

)

(0.08

)

(0.05

)

New York

27,275


26,624


1.39


1.65

(0.01

)

-


0.05


0.02


0.06


New Jersey

13,210


13,212


2.43


2.74

0.08


0.09


0.15


0.17


0.22


Florida

12,868


13,083


3.11


3.95

(0.14

)

(0.16

)

(0.22

)

(0.18

)

(0.08

)

Washington

8,952


8,845


0.70


0.85

(0.06

)

(0.05

)

(0.09

)

(0.10

)

(0.07

)

Other

92,423


92,961


1.97


2.25

0.01


(0.02

)

0.03


0.02


0.05


Total

257,254


256,189


1.48


1.78

(0.03

)

(0.04

)

(0.03

)

(0.03

)

0.01


Government insured/guaranteed loans

14,795


15,143


PCI

10,609


12,722


Total first lien mortgages

$

282,658


284,054



30


Pick-a-Pay Portfolio The Pick-a-Pay portfolio was one of the consumer residential first lien mortgage portfolios we acquired from Wachovia and a majority of the portfolio was identified as PCI loans.

The Pick-a-Pay portfolio includes loans that offer payment options (Pick-a-Pay option payment loans), and also includes loans that were originated without the option payment feature, loans that no longer offer the option feature as a result of our modification efforts since the acquisition, and loans where the customer voluntarily converted to a fixed-rate product. The Pick-a-Pay portfolio is included in the consumer real estate 1-4 family first mortgage class of loans throughout this Report. Table 18 provides balances by types of loans as of March 31, 2018 . As a

result of our loan modification and loss mitigation efforts, Pick-a-Pay option payment loans have been reduced to $10.4 billion at March 31, 2018, from $99.9 billion at acquisition. Total adjusted unpaid principal balance of Pick-a-Pay PCI loans was $14.0 billion at March 31, 2018 , compared with $61.0 billion at acquisition. Due to loan modification and loss mitigation efforts, the adjusted unpaid principal balance of option payment PCI loans has declined to 15% of the total Pick-a-Pay portfolio at March 31, 2018 , compared with 51% at acquisition. We expect to close on the sale of approximately $1.9 billion of unpaid principal balance of Pick-a-Pay PCI loans in second quarter 2018.

Table 18: Pick-a-Pay Portfolio – Comparison to Acquisition Date

December 31,

March 31, 2018

2017

2008

(in millions)

Adjusted

unpaid

principal

balance (1)


% of

total


Adjusted

unpaid

principal

balance (1)


% of

total


Adjusted

unpaid

principal

balance (1)


% of

total


Option payment loans

$

10,361


39

%

$

10,891


36

%

$

99,937


86

%

Non-option payment adjustable-rate

and fixed-rate loans

3,519


13


3,771


13


15,763


14


Full-term loan modifications

12,877


48


15,366


51


-


-


Total adjusted unpaid principal balance

$

26,757


100

%

$

30,028


100

%

$

115,700


100

%

Total carrying value

$

23,361


26,038


95,315


(1)

Adjusted unpaid principal balance includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.


Pick-a-Pay option payment loans may have fixed or adjustable rates with payment options that include a minimum payment, an interest-only payment or fully amortizing payment (both 15 and 30 year options).

Since December 31, 2008, we have completed over 138,000 proprietary and Home Affordability Modification Program (HAMP) Pick-a-Pay loan modifications, which have resulted in over $6.1 billion of principal forgiveness. We have also provided interest rate reductions and loan term extensions to enable sustainable homeownership for our Pick-a-Pay customers. As a result of these loss mitigation programs, approximately 68% of our Pick-a-Pay PCI adjusted unpaid principal balance as of March 31, 2018 has been modified.

The predominant portion of our PCI loans is included in the Pick-a-Pay portfolio. Our cash flows expected to be collected have been favorably affected over time by lower expected defaults and losses as a result of observed and forecasted economic strengthening, particularly in housing prices, and our loan modification efforts. Since acquisition, we have reclassified $9.3 billion from the nonaccretable difference to the accretable yield. Fluctuations in the accretable yield are driven by changes in interest rate indices for variable rate PCI loans, prepayment assumptions, and expected principal and interest payments over the estimated life of the portfolio, which will be affected by the pace and degree of improvements in the U.S. economy and housing markets and projected lifetime performance resulting from loan modification activity. Changes in the projected timing of cash flow events, including loan liquidations, modifications and short sales, can also affect the accretable yield and the estimated weighted-average life of the portfolio.

An increase in expected prepayments and passage of time lowered our estimated weighted-average life to approximately 5.5 years at March 31, 2018, from 6.8 years at December 31, 2017. During first quarter 2018, we sold $1.6 billion of Pick-a-Pay PCI loans that resulted in a gain of $643 million. Also, the accretable yield balance related to our Pick-a-Pay PCI loan portfolio declined $2.0 billion during first quarter 2018, driven by realized accretion of $299 million, $643 million from the gain on the loan sale, a $629 million reduction in expected interest cash flows resulting from the loan sale, and a $779 million reduction in expected interest cash flows due to higher estimated prepayments, partially offset by a $340 million reclassification from nonaccretable difference. The accretable yield percentage for Pick-a-Pay PCI loans for first quarter 2018 increased to 9.85%. Due to an increase in the amount of accretable yield relative to the shortened weighted-average life, we expect the accretable yield percentage to be approximately 11.47% for second quarter 2018.

For further information on the judgment involved in estimating expected cash flows for PCI loans, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2017 Form 10-K.



31


Junior Lien Mortgage Portfolio   The junior lien mortgage portfolio consists of residential mortgage lines and loans that are subordinate in rights to an existing lien on the same property. It is not unusual for these lines and loans to have draw periods, interest only payments, balloon payments, adjustable rates and similar features. Junior lien loan products are mostly amortizing payment loans with fixed interest rates and repayment periods between five to 30 years. 

We continuously monitor the credit performance of our junior lien mortgage portfolio for trends and factors that influence the frequency and severity of loss. We have observed that the severity of loss for junior lien mortgages is high and generally not affected by whether we or a third party own or service the related first lien mortgage, but the frequency of delinquency is typically lower when we own or service the first lien mortgage. In general, we have limited information available on the delinquency status of the third party owned or serviced first lien where we also hold a junior lien. To capture this inherent loss content, our allowance process for junior lien mortgages considers the relative difference in loss experience for junior lien mortgages behind first lien mortgage loans we own or service, compared with those behind first lien mortgage loans owned or serviced by third parties. In addition, our allowance

process for junior lien mortgages that are current, but are in their revolving period, considers the inherent loss where the borrower is delinquent on the corresponding first lien mortgage loans.

Table 19 shows certain delinquency and loss information for the junior lien mortgage portfolio and lists the top five states by outstanding balance. The decrease in outstanding balances since December 31, 2017 , predominantly reflects loan paydowns. As of March 31, 2018 , 8% of the outstanding balance of the junior lien mortgage portfolio was associated with loans that had a combined loan to value (CLTV) ratio in excess of 100%. Of those junior lien mortgages with a CLTV ratio in excess of 100%, 2.99% were 30 days or more past due. CLTV means the ratio of the total loan balance of first lien mortgages and junior lien mortgages (including unused line amounts for credit line products) to property collateral value. The unsecured portion (the outstanding amount that was in excess of the most recent property collateral value) of the outstanding balances of these loans totaled 3% of the junior lien mortgage portfolio at March 31, 2018 . For additional information on consumer loans by LTV/CLTV, see Table 6.12 in Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

Table 19: Junior Lien Mortgage Portfolio Performance

Outstanding balance

% of loans 30 days or more past due

Loss (recovery) rate (annualized) quarter ended

(in millions)

Mar 31,
2018


Dec 31,
2017


Mar 31,
2018


Dec 31,
2017

Mar 31,
2018


Dec 31,
2017


Sep 30,
2017


Jun 30,
2017


Mar 31,
2017


California

$

10,092


10,599


1.92

%

2.09

(0.42

)

(0.35

)

(0.46

)

(0.42

)

(0.37

)

Florida

3,531


3,688


2.65


3.05

(0.12

)

0.13


0.06


(0.10

)

0.30


New Jersey

3,478


3,606


2.89


2.86

0.44


0.47


0.58


0.44


1.06


Virginia

2,258


2,358


2.22


2.34

0.25


0.15


0.33


0.17


0.48


Pennsylvania

2,125


2,210


2.23


2.37

0.06


0.11


0.47


0.29


0.67


Other

16,411


17,225


2.21


2.33

(0.05

)

(0.09

)

0.06


0.05


0.28


 Total

37,895



39,686


2.24


2.38

(0.09

)

(0.06

)

-


(0.03

)

0.21


PCI

25


27


Total junior lien mortgages

$

37,920


39,713




32

Risk Management - Credit Risk Management (continued)


Our junior lien, as well as first lien, lines of credit portfolios generally have draw periods of 10, 15 or 20 years with variable interest rate and payment options during the draw period of (1) interest only or (2) 1.5% of outstanding principal balance plus accrued interest. During the draw period, the borrower has the option of converting all or a portion of the line from a variable interest rate to a fixed rate with terms including interest-only payments for a fixed period between three to seven years or a fully amortizing payment with a fixed period between five to 30 years. At the end of the draw period, a line of credit generally converts to an amortizing payment schedule with repayment terms of up to 30 years based on the balance at time of conversion. Certain lines and loans have been structured with a balloon payment, which requires full repayment of the outstanding balance at the end of the term period. The conversion of lines or loans to fully amortizing or balloon payoff may result in a significant payment increase, which can affect some borrowers' ability to repay the outstanding balance.

On a monthly basis, we monitor the payment characteristics of borrowers in our first and junior lien lines of credit portfolios. In March 2018 , approximately 42% of these borrowers paid only the minimum amount due and approximately 53% paid more than the minimum amount due. The rest were either delinquent or paid less than the minimum amount due. For the borrowers

with an interest only payment feature, approximately 29% paid only the minimum amount due and approximately 66% paid more than the minimum amount due.

The lines that enter their amortization period may experience higher delinquencies and higher loss rates than the ones in their draw or term period. We have considered this increased inherent risk in our allowance for credit loss estimate.

In anticipation of our borrowers reaching the end of their contractual commitment, we have created a program to inform, educate and help these borrowers transition from interest-only to fully-amortizing payments or full repayment. We monitor the performance of the borrowers moving through the program in an effort to refine our ongoing program strategy.

Table 20 reflects the outstanding balance of our portfolio of junior lien mortgages, including lines and loans, and first lien lines segregated into scheduled end of draw or end of term periods and products that are currently amortizing, or in balloon repayment status. It excludes real estate 1-4 family first lien line reverse mortgages, which total $124 million , because they are predominantly insured by the FHA, and it excludes PCI loans, which total $46 million , because their losses were generally reflected in our nonaccretable difference established at the date of acquisition.

Table 20: Junior Lien Mortgage Line and Loan and First Lien Mortgage Line Portfolios Payment Schedule

Scheduled end of draw / term

(in millions)

Outstanding balance March 31, 2018


Remainder of 2018


2019


2020


2021


2022


2023 and

thereafter (1)


Amortizing


Junior lien lines and loans

$

37,895


962


635


619


1,289


4,462


17,217


12,711


First lien lines

12,907


357


227


240


566


2,106


7,354


2,057


Total (2)(3)

$

50,802


1,319


862


859


1,855


6,568


24,571


14,768


% of portfolios

100

%

3


2


2


4


13


48


28


(1)

Substantially all lines and loans are scheduled to convert to amortizing loans by the end of 2026, with annual scheduled amounts through that date ranging from $3.8 billion to $6.6 billion and averaging $5.3 billion per year.

(2)

Junior and first lien lines are primarily interest-only during their draw period. The unfunded credit commitments for junior and first lien lines totaled $62.1 billion at March 31, 2018 .

(3)

Includes scheduled end-of-term balloon payments for lines and loans totaling $151 million , $241 million , $271 million , $438 million , $217 million and $72 million for 2018 , 2019 , 2020 , 2021 , 2022 , and 2023 and thereafter , respectively. Amortizing lines and loans include $76 million of end-of-term balloon payments, which are past due. At March 31, 2018 , $526 million , or 4% of outstanding lines of credit that are amortizing, are 30 days or more past due compared to $600 million or 2% for lines in their draw period.

CREDIT CARDS   Our credit card portfolio totaled $36.1 billion at March 31, 2018 , which represented 4% of our total outstanding loans. The net charge-off rate (annualized) for our credit card portfolio was 3.69% for first quarter 2018 , compared with 3.54% for first quarter 2017 .

AUTOMOBILE Our automobile portfolio, predominantly composed of indirect loans, totaled $49.6 billion at March 31, 2018 . The net charge-off rate (annualized) for our automobile portfolio was 1.64% for first quarter 2018 , compared with 1.10% for first quarter 2017 . The increase in net charge-offs in first quarter 2018, compared with first quarter 2017, was driven by higher severity.

In February 2018, we entered into an agreement to sell certain assets and liabilities of our automobile financing business in Puerto Rico, which is expected to close in second quarter 2018. As a result, automobile loans of $1.6 billion were transferred to loans held for sale in first quarter 2018.

OTHER REVOLVING CREDIT AND INSTALLMENT Other revolving credit and installment loans totaled $37.7 billion at March 31, 2018 , and primarily included student and securities-based loans. Our private student loan portfolio totaled $ 11.9 billion at March 31, 2018 . The net charge-off rate (annualized) for other revolving credit and installment loans was 1.60% for both first quarter 2018 and first quarter 2017.


33


NONPERFORMING ASSETS (NONACCRUAL LOANS AND FORECLOSED ASSETS) Table 21 summarizes nonperforming assets (NPAs) for each of the last four quarters. Total NPAs decreased $388 million from fourth quarter 2017 to $8.3 billion with improvement across our consumer and commercial portfolios. Nonaccrual loans decreased $317 million from fourth quarter 2017 to $7.7 billion primarily driven by lower commercial and industrial nonaccruals reflecting continued improvement in the oil and gas portfolio, as well as continued declines in consumer real estate nonaccruals. Foreclosed assets of $571 million were down $71 million from fourth quarter 2017 .


We generally place loans on nonaccrual status when:

the full and timely collection of interest or principal becomes uncertain (generally based on an assessment of the borrower's financial condition and the adequacy of collateral, if any);

they are 90 days (120 days with respect to real estate 1-4 family first and junior lien mortgages) past due for interest or principal, unless both well-secured and in the process of collection;

part of the principal balance has been charged off;

for junior lien mortgages, we have evidence that the related first lien mortgage may be 120 days past due or in the process of foreclosure regardless of the junior lien delinquency status; or

consumer real estate and automobile loans receive notification of bankruptcy, regardless of their delinquency status.


Credit card loans are not placed on nonaccrual status, but are generally fully charged off when the loan reaches 180 days past due.


Table 21: Nonperforming Assets (Nonaccrual Loans and Foreclosed Assets)

March 31, 2018

December 31, 2017

September 30, 2017

June 30, 2017

($ in millions)

Balance


% of

total

loans


Balance


% of

total

loans


Balance


% of

total

loans


Balance


% of

total

loans


Nonaccrual loans:

Commercial:

Commercial and industrial

$

1,516


0.45

%

$

1,899


0.57

%

$

2,397


0.73

%

$

2,632


0.79

%

Real estate mortgage

755


0.60


628


0.50


593


0.46


630


0.48


Real estate construction

45


0.19


37


0.15


38


0.15


34


0.13


Lease financing

93


0.48


76


0.39


81


0.42


89


0.46


Total commercial

2,409


0.48


2,640


0.52


3,109


0.62


3,385


0.67


Consumer:

Real estate 1-4 family first mortgage (1)

4,053


1.43


4,122


1.45


4,213


1.50


4,413


1.60


Real estate 1-4 family junior lien mortgage

1,087


2.87


1,086


2.73


1,101


2.68


1,095


2.56


Automobile

117


0.24


130


0.24


137


0.25


104


0.18


Other revolving credit and installment

53


0.14


58


0.15


59


0.15


59


0.15


Total consumer (2)

5,310


1.20


5,396


1.19


5,510


1.22


5,671


1.26


Total nonaccrual loans (3)(4)(5)

7,719


0.81


8,036


0.84


8,619


0.91


9,056


0.95


Foreclosed assets:

Government insured/guaranteed (6)

103


120


137


149


Non-government insured/guaranteed

468


522


569


632


Total foreclosed assets

571


642


706


781


Total nonperforming assets

$

8,290


0.88

%

$

8,678


0.91

%

$

9,325


0.98

%

$

9,837


1.03

%

Change in NPAs from prior quarter

$

(388

)

(647

)

(512

)

(827

)

(1)

Includes MHFS of $137 million , $136 million, $133 million, and $140 million at March 31, 2018 , and December 31, September 30 and June 30, 2017 , respectively.

(2)

Includes an incremental $171 million of nonaccrual loans at September 30, 2017, reflecting updated industry regulatory guidance related to loans in bankruptcy.

(3)

Excludes PCI loans because they continue to earn interest income from accretable yield, independent of performance in accordance with their contractual terms.

(4)

Real estate 1-4 family mortgage loans predominantly insured by the FHA or guaranteed by the VA are not placed on nonaccrual status because they are insured or guaranteed.

(5)

See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for further information on impaired loans.

(6)

Consistent with regulatory reporting requirements, foreclosed real estate resulting from government insured/guaranteed loans are classified as nonperforming. However, both principal and interest related to these foreclosed real estate assets are collectible because the loans were predominantly insured by the FHA or guaranteed by the VA. Foreclosure of certain government guaranteed residential real estate mortgage loans that meet criteria specified by Accounting Standards Update (ASU) 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure , effective as of January 1, 2014, are excluded from this table and included in Accounts Receivable in Other Assets. For more information on the changes in foreclosures for government guaranteed residential real estate mortgage loans, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2017 Form 10-K.


34

Risk Management - Credit Risk Management (continued)


Table 22 provides an analysis of the changes in nonaccrual loans.

Table 22: Analysis of Changes in Nonaccrual Loans

Quarter ended

(in millions)

Mar 31,
2018


Dec 31,
2017


Sep 30,
2017


Jun 30,
2017


Mar 31,
2017


Commercial nonaccrual loans

Balance, beginning of period

$

2,640


3,109


3,385


3,706


4,059


Inflows

605


617


627


704


945


Outflows:

Returned to accruing

(113

)

(126

)

(97

)

(61

)

(133

)

Foreclosures

-


(1

)

(3

)

(15

)

(1

)

Charge-offs

(119

)

(139

)

(173

)

(116

)

(202

)

Payments, sales and other

(604

)

(820

)

(630

)

(833

)

(962

)

Total outflows

(836

)

(1,086

)

(903

)

(1,025

)

(1,298

)

Balance, end of period

2,409



2,640



3,109



3,385



3,706


Consumer nonaccrual loans

Balance, beginning of period

5,396


5,510


5,671


6,053


6,325


Inflows (1)

738


845


887


676


814


Outflows:

Returned to accruing

(376

)

(345

)

(397

)

(425

)

(428

)

Foreclosures

(62

)

(72

)

(56

)

(72

)

(81

)

Charge-offs

(88

)

(94

)

(109

)

(117

)

(151

)

Payments, sales and other

(298

)

(448

)

(486

)

(444

)

(426

)

Total outflows

(824

)

(959

)

(1,048

)

(1,058

)

(1,086

)

Balance, end of period

5,310



5,396



5,510



5,671



6,053


Total nonaccrual loans

$

7,719


8,036


8,619


9,056


9,759


(1)

Quarter ended September 30, 2017, includes an incremental $171 million of nonaccrual loans, reflecting updated industry regulatory guidance related to loans in bankruptcy.


Typically, changes to nonaccrual loans period-over-period represent inflows for loans that are placed on nonaccrual status in accordance with our policy, offset by reductions for loans that are paid down, charged off, sold, foreclosed, or are no longer classified as nonaccrual as a result of continued performance and an improvement in the borrower's financial condition and loan repayment capabilities. Also, reductions can come from borrower repayments even if the loan remains on nonaccrual.

While nonaccrual loans are not free of loss content, we believe exposure to loss is significantly mitigated by the following factors at March 31, 2018 :

over 99% of total commercial nonaccrual loans and 99% of total consumer nonaccrual loans are secured. Of the consumer nonaccrual loans, 97% are secured by real estate and 83% have a combined LTV (CLTV) ratio of 80% or less.

losses of $349 million and $1.7 billion  have already been recognized on 20% of commercial nonaccrual loans and 43% of consumer nonaccrual loans, respectively. Generally, when a consumer real estate loan is 120 days past due (except when required earlier by guidance issued by bank regulatory agencies), we transfer it to nonaccrual status. When the loan reaches 180 days past due, or is active or discharged in bankruptcy, it is our policy to write these loans down to net realizable value (fair value of collateral less estimated costs to sell). Thereafter, we re-evaluate each loan regularly and record additional write-downs if needed.


83% of commercial nonaccrual loans were current on interest, but were on nonaccrual status because the full or timely collection of interest or principal had become uncertain.

77% of commercial nonaccrual loans were current on both principal and interest, but will remain on nonaccrual status until the full and timely collection of principal and interest becomes certain.

the remaining risk of loss of all nonaccrual loans has been considered and we believe is adequately covered by the allowance for loan losses.

of $2.3 billion of consumer loans in bankruptcy or discharged in bankruptcy, and classified as nonaccrual, $1.5 billion were current.


We continue to work with our customers experiencing financial difficulty to determine if they can qualify for a loan modification so that they can stay in their homes. Under both our proprietary modification programs and the Making Home Affordable (MHA) programs, customers may be required to provide updated documentation, and some programs require completion of payment during trial periods to demonstrate sustained performance before the loan can be removed from nonaccrual status.


35


Table 23 provides a summary of foreclosed assets and an analysis of changes in foreclosed assets.


Table 23: Foreclosed Assets

(in millions)

Mar 31,
2018


Dec 31,
2017


Sep 30,
2017


Jun 30,
2017


Mar 31,
2017


Summary by loan segment

Government insured/guaranteed

$

103


120


137


149


179


PCI loans:

Commercial

59


57


67


79


84


Consumer

58


62


72


67


80


Total PCI loans

117


119


139


146


164


All other loans:

Commercial

162


207


226


259


275


Consumer

189


196


204


227


287


Total all other loans

351


403


430


486


562


Total foreclosed assets

$

571


642


706


781


905


Analysis of changes in foreclosed assets

Balance, beginning of period

$

642


706


781


905


978


Net change in government insured/guaranteed (1)

(17

)

(17

)

(12

)

(30

)

(18

)

Additions to foreclosed assets (2)

185


180


198


233


288


Reductions:

Sales

(245

)

(231

)

(257

)

(330

)

(307

)

Write-downs and gains (losses) on sales

6


4


(4

)

3


(36

)

Total reductions

(239

)

(227

)

(261

)

(327

)

(343

)

Balance, end of period

$

571


642


706


781


905


(1)

Foreclosed government insured/guaranteed loans are temporarily transferred to and held by us as servicer, until reimbursement is received from FHA or VA. The net change in government insured/guaranteed foreclosed assets is generally made up of inflows from mortgages held for investment and MHFS, and outflows when we are reimbursed by FHA/VA.

(2)

Includes loans moved into foreclosure from nonaccrual status, PCI loans transitioned directly to foreclosed assets and repossessed automobiles.


Foreclosed assets at March 31, 2018 , included $342 million of foreclosed residential real estate, of which 30% is predominantly FHA insured or VA guaranteed and expected to have minimal or no loss content. The remaining foreclosed assets balance of $229 million has been written down to estimated net realizable value. Of the $571 million in foreclosed assets at March 31, 2018 , 57% have been in the foreclosed assets portfolio one year or less.



36

Risk Management - Credit Risk Management (continued)


TROUBLED DEBT RESTRUCTURINGS (TDRs)


Table 24: Troubled Debt Restructurings (TDRs)

(in millions)

Mar 31,
2018



Dec 31,
2017



Sep 30,
2017



Jun 30,
2017



Mar 31,
2017


Commercial:

Commercial and industrial

$

1,703


2,096


2,424


2,629


2,484


Real estate mortgage

939


901


953


1,024


1,090


Real estate construction

45


44


48


62


73


Lease financing

53


35


39


21


8


Total commercial TDRs

2,740


3,076


3,464


3,736


3,655


Consumer:

Real estate 1-4 family first mortgage

11,782


12,080


12,617


13,141


13,680


Real estate 1-4 family junior lien mortgage

1,794


1,849


1,919


1,975


2,027


Credit Card

386


356


340


316


308


Automobile

83


87


88


85


80


Other revolving credit and installment

137


126


124


118


107


Trial modifications

198


194


183


215


261


Total consumer TDRs

14,380


14,692


15,271


15,850


16,463


Total TDRs

$

17,120


17,768


18,735


19,586


20,118


TDRs on nonaccrual status

$

4,428


4,801


5,218


5,637


5,819


TDRs on accrual status:

Government insured/guaranteed

1,375


1,359


1,377


1,390


1,479


Non-government insured/guaranteed

11,317


11,608


12,140


12,559


12,820


Total TDRs

$

17,120


17,768


18,735


19,586


20,118



Table 24 provides information regarding the recorded investment of loans modified in TDRs. The allowance for loan losses for TDRs was $1.4 billion and $1.6 billion at March 31, 2018 , and December 31, 2017 , respectively. See Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report for additional information regarding TDRs. In those situations where principal is forgiven, the entire amount of such forgiveness is immediately charged off to the extent not done so prior to the modification. When we delay the timing on the repayment of a portion of principal (principal forbearance), we charge off the amount of forbearance if that amount is not considered fully collectible.

For more information on our nonaccrual policies when a restructuring is involved, see the "Risk Management – Credit Risk Management – Troubled Debt Restructurings (TDRs)" section in our 2017 Form 10-K.

Table 25 provides an analysis of the changes in TDRs. Loans modified more than once are reported as TDR inflows only in the period they are first modified. Other than resolutions such as foreclosures, sales and transfers to held for sale, we may remove loans held for investment from TDR classification, but only if they have been refinanced or restructured at market terms and qualify as a new loan.


37


Table 25: Analysis of Changes in TDRs

Quarter ended

(in millions)

Mar 31,
2018


Dec 31,
2017


Sep 30,
2017


Jun 30,
2017


Mar 31,
2017


Commercial TDRs

Balance, beginning of quarter

$

3,076


3,464


3,736


3,655


3,800


Inflows (1)

321


412


333


730


642


Outflows

Charge-offs

(63

)

(65

)

(74

)

(59

)

(108

)

Foreclosures

-


(1

)

(2

)

(12

)

-


Payments, sales and other (2)

(594

)

(734

)

(529

)

(578

)

(679

)

Balance, end of quarter

2,740


3,076


3,464


3,736


3,655


Consumer TDRs

Balance, beginning of quarter

14,692


15,271


15,850


16,463


16,993


Inflows (1)

487


395


461


444


517


Outflows

Charge-offs

(54

)

(52

)

(51

)

(51

)

(51

)

Foreclosures

(131

)

(135

)

(146

)

(159

)

(179

)

Payments, sales and other (2)

(618

)

(798

)

(811

)

(801

)

(779

)

Net change in trial modifications (3)

4


11


(32

)

(46

)

(38

)

Balance, end of quarter

14,380


14,692


15,271


15,850


16,463


Total TDRs

$

17,120


17,768


18,735


19,586


20,118


(1)

Inflows include loans that modify, even if they resolve within the period as well as advances on loans that modified in a prior period.

(2)

Other outflows include normal amortization/accretion of loan basis adjustments and loans transferred to held-for-sale. It also includes $5 million and $6 million of loans refinanced or restructured at market terms and qualifying as new loans and removed from TDR classification for the quarters ended March 31, 2018 and September 30, 2017, respectively, while no loans were removed from TDR classification for the quarters ended December 31, June 30 and March 31, 2017 .

(3)

Net change in trial modifications includes: inflows of new TDRs entering the trial payment period, net of outflows for modifications that either (i) successfully perform and enter into a permanent modification, or (ii) did not successfully perform according to the terms of the trial period plan and are subsequently charged-off, foreclosed upon or otherwise resolved.



38


LOANS 90 DAYS OR MORE PAST DUE AND STILL ACCRUING

Loans 90 days or more past due as to interest or principal are still accruing if they are (1) well-secured and in the process of collection or (2) real estate 1-4 family mortgage loans or consumer loans exempt under regulatory rules from being classified as nonaccrual until later delinquency, usually 120 days past due. PCI loans are not included in past due and still accruing loans even when they are 90 days or more contractually past due. These PCI loans are considered to be accruing because they continue to earn interest from accretable yield, independent of performance in accordance with their contractual terms.

Excluding insured/guaranteed loans, loans 90 days or more past due and still accruing at March 31, 2018 , were down $96 million , or 9% , from December 31, 2017 , due to payoffs,

modifications and other loss mitigation activities and credit stabilization. Also, fluctuations from quarter to quarter are influenced by seasonality.

Loans 90 days or more past due and still accruing whose repayments are predominantly insured by the FHA or guaranteed by the VA for mortgages were $9.8 billion at March 31, 2018 , down from $10.9 billion at December 31, 2017 , due to improving credit trends and seasonality.

Table 26 reflects non-PCI loans 90 days or more past due and still accruing by class for loans not government insured/guaranteed. For additional information on delinquencies by loan class, see Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

Table 26: Loans 90 Days or More Past Due and Still Accruing

(in millions)

Mar 31, 2018


Dec 31, 2017


Sep 30, 2017


Jun 30, 2017


Mar 31, 2017


Total (excluding PCI (1)):

$

10,753


11,997


10,227


9,716


10,525


Less: FHA insured/VA guaranteed (2)(3)

9,786


10,934


9,266


8,873


9,585


Total, not government insured/guaranteed

$

967


1,063


961


843


940


By segment and class, not government insured/guaranteed:

Commercial:

Commercial and industrial

$

40


26


27


42


88


Real estate mortgage

23


23


11


2


11


Real estate construction

1


-


-


10


3


Total commercial

64



49



38



54



102


Consumer:

Real estate 1-4 family first mortgage (3)

164


219


190


145


149


Real estate 1-4 family junior lien mortgage (3)

48


60


49


44


42


Credit card

473


492


475


411


453


Automobile

113


143


111


91


79


Other revolving credit and installment

105


100


98


98


115


Total consumer

903


1,014



923



789



838


Total, not government insured/guaranteed

$

967


1,063



961



843



940


(1)

PCI loans totaled $1.0 billion , $1.4 billion , $1.4 billion , $1.5 billion , and $1.8 billion at March 31, 2018 , and December 31 , September 30 , June 30 and March 31, 2017 , respectively.

(2)

Represents loans whose repayments are predominantly insured by the FHA or guaranteed by the VA.

(3)

Includes mortgages held for sale 90 days or more past due and still accruing.



39


NET CHARGE-OFFS


Table 27: Net Charge-offs

Quarter ended 

Mar 31, 2018

Dec 31, 2017

Sep 30, 2017

Jun 30, 2017

Mar 31, 2017

($ in millions)

Net loan

charge-

offs


% of 

avg. 

loans (1) 


Net loan

charge-

offs


% of avg. loans (1)


Net loan

charge-

offs


% of avg. loans (1)


Net loan

charge-offs


% of

avg. loans (1)


Net loan

charge-offs


% of

avg.

loans (1)


Commercial:

Commercial and industrial

$

85


0.10

 %

$

118


0.14

 %

$

125


0.15

 %

$

78


0.10

 %

$

171


0.21

 %

Real estate mortgage

(15

)

(0.05

)

(10

)

(0.03

)

(3

)

(0.01

)

(6

)

(0.02

)

(25

)

(0.08

)

Real estate construction

(4

)

(0.07

)

(3

)

(0.05

)

(15

)

(0.24

)

(4

)

(0.05

)

(8

)

(0.15

)

Lease financing

12


0.25


10


0.20


6


0.12


7


0.15


5


0.11


Total commercial

78


0.06


115


0.09


113


0.09


75


0.06


143


0.11


Consumer:

Real estate 1-4 family

first mortgage

(18

)

(0.03

)

(23

)

(0.03

)

(16

)

(0.02

)

(16

)

(0.02

)

7


0.01


Real estate 1-4 family

junior lien mortgage

(8

)

(0.09

)

(7

)

(0.06

)

1


-


(4

)

(0.03

)

23


0.21


Credit card

332


3.69


336


3.66


277


3.08


320


3.67


309


3.54


Automobile

208


1.64


188


1.38


202


1.41


126


0.86


167


1.10


Other revolving credit and

installment

149


1.60


142


1.46


140


1.44


154


1.58


156


1.60


Total consumer

663


0.60


636


0.56


604


0.53


580


0.51


662


0.59


Total

$

741


0.32

 %

$

751


0.31

 %

$

717


0.30

 %

$

655


0.27

 %

$

805


0.34

 %

(1)

Quarterly net charge-offs (recoveries) as a percentage of average respective loans are annualized.


Table 27 presents net charge-offs for first quarter 2018 and the previous four quarters. Net charge-offs in first quarter 2018 were $741 million ( 0.32% of average total loans outstanding) compared with $805 million ( 0.34% ) in first quarter 2017 .

The decrease in commercial and industrial net charge-offs from first quarter 2017 reflected continued improvement in our oil and gas portfolio. Our commercial real estate portfolios were in a net recovery position. Total consumer net charge-offs increased slightly from the prior year as increases in credit card and automobile net charge-offs were substantially all offset by decreases in residential real estate and other revolving credit and installment net charge-offs.

ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses, which consists of the allowance for loan losses and the allowance for unfunded credit commitments, is management's estimate of credit losses inherent in the loan portfolio and unfunded credit commitments at the balance sheet date, excluding loans carried at fair value. The detail of the changes in the allowance for credit losses by portfolio segment (including charge-offs and recoveries by loan class) is in Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

We apply a disciplined process and methodology to establish our allowance for credit losses each quarter. This process takes into consideration many factors, including historical and forecasted loss trends, loan-level credit quality ratings and loan grade-specific characteristics. The process involves subjective and complex judgments. In addition, we review a variety of credit metrics and trends. These credit metrics and trends, however, do not solely determine the amount of the allowance as we use several analytical tools. Our estimation approach for the commercial portfolio reflects the estimated probability of default in accordance with the borrower's financial strength, and the severity of loss in the event of default, considering the quality of any underlying collateral. Probability of default and severity at the time of default are statistically derived through historical observations of defaults and losses after default within each credit risk rating. Our estimation approach for the consumer portfolio uses forecasted losses that represent our best estimate of inherent loss based on historical experience, quantitative and other mathematical techniques. For additional information on our allowance for credit losses, see the "Critical Accounting Policies – Allowance for Credit Losses" section in our 2017 Form 10-K and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

Table 28 presents the allocation of the allowance for credit losses by loan segment and class for the most recent quarter end and last four year ends.


40

Risk Management - Credit Risk Management (continued)


Table 28: Allocation of the Allowance for Credit Losses (ACL)

Mar 31, 2018

Dec 31, 2017

Dec 31, 2016

Dec 31, 2015

Dec 31, 2014

(in millions)

ACL


Loans

as %

of total

loans


ACL


Loans

as %

of total

loans


ACL


Loans

as %

of total

loans


ACL


Loans

as %

of total

loans


ACL


Loans

as %

of total

loans


Commercial:

Commercial and industrial

$

3,789


35

%

$

3,752


35

%

$

4,560


34

%

$

4,231


33

%

$

3,506


32

%

Real estate mortgage

1,361


13


1,374


13


1,320


14


1,264


13


1,576


13


Real estate construction

1,274


3


1,238


3


1,294


2


1,210


3


1,097


2


Lease financing

284


2


268


2


220


2


167


1


198


1


Total commercial

6,708


53


6,632


53


7,394


52


6,872


50


6,377


48


Consumer:

Real estate 1-4 family first mortgage

869


30


1,085


30


1,270


29


1,895


30


2,878


31


Real estate 1-4 family

junior lien mortgage

530


4


608


4


815


5


1,223


6


1,566


7


Credit card

1,969


4


1,944


4


1,605


4


1,412


4


1,271


4


Automobile

671


5


1,039


5


817


6


529


6


516


6


Other revolving credit and installment

566


4


652


4


639


4


581


4


561


4


Total consumer

4,605


47


5,328


47


5,146


48


5,640


50


6,792


52


Total

$

11,313


100

%

$

11,960


100

%

$

12,540


100

%

$

12,512


100

%

$

13,169


100

%

Mar 31, 2018

Dec 31, 2017

Dec 31, 2016

Dec 31, 2015

Dec 31, 2014

Components:

Allowance for loan losses

$

10,373

11,004

11,419

11,545

12,319

Allowance for unfunded

credit commitments

940

956

1,121

967

850

Allowance for credit losses

$

11,313

11,960

12,540

12,512

13,169

Allowance for loan losses as a percentage of total loans

1.10

%

1.15

1.18

1.26

1.43

Allowance for loan losses as a percentage of total net charge-offs (1)

345

376

324

399

418

Allowance for credit losses as a percentage of total loans

1.19

1.25

1.30

1.37

1.53

Allowance for credit losses as a percentage of total nonaccrual loans

147

149

121

110

103

(1)

Total net charge-offs are annualized for quarter ended March 31, 2018 .


In addition to the allowance for credit losses, there was $293 million at March 31, 2018 , and $474 million at December 31, 2017 of nonaccretable difference to absorb losses for PCI loans, which totaled $10.7 billion at March 31, 2018 . The allowance for credit losses is lower than otherwise would have been required without PCI loan accounting. As a result of PCI loans, certain ratios of the Company may not be directly comparable with credit-related metrics for other financial institutions. Additionally, loans purchased at fair value, including loans from the GE Capital business acquisitions in 2016, generally reflect a lifetime credit loss adjustment and therefore do not initially require additions to the allowance as is typically associated with loan growth. For additional information on PCI loans, see the "Risk Management – Credit Risk Management – Purchased Credit-Impaired Loans" section and Note 6 (Loans and Allowance for Credit Losses) to Financial Statements in this Report.

The ratio of the allowance for credit losses to total nonaccrual loans may fluctuate significantly from period to period due to such factors as the mix of loan types in the portfolio, borrower credit strength and the value and marketability of collateral.

The allowance for credit losses decreased $647 million , or 5% , from December 31, 2017 , due to an improvement in our outlook for 2017 hurricane-related losses, as well as continued improvement in residential real estate and lower loan balances. Total provision for credit losses was $191 million in first quarter 2018 , compared with $605 million in first quarter 2017 , reflecting the same changes mentioned above for the allowance for credit losses.

We believe the allowance for credit losses of $11.3 billion at March 31, 2018 , was appropriate to cover credit losses inherent in the loan portfolio, including unfunded credit commitments, at that date. The entire allowance is available to absorb credit losses inherent in the total loan portfolio. The allowance for credit losses is subject to change and reflects existing factors as of the date of determination, including economic or market conditions and ongoing internal and external examination processes. Due to the sensitivity of the allowance for credit losses to changes in the economic and business environment, it is possible that we will incur incremental credit losses not anticipated as of the balance sheet date. Future allowance levels will be based on a variety of factors, including loan growth, portfolio performance and general


41


economic conditions. Our process for determining the allowance for credit losses is discussed in the "Critical Accounting Policies – Allowance for Credit Losses" section and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2017 Form 10-K.

LIABILITY FOR MORTGAGE LOAN REPURCHASE LOSSES 

In connection with our sales and securitization of residential mortgage loans to various parties, we have established a mortgage repurchase liability, initially at fair value, related to various representations and warranties that reflect management's estimate of losses for loans for which we could have a repurchase obligation, whether or not we currently service those loans, based on a combination of factors. Our mortgage repurchase liability estimation process also incorporates a forecast of repurchase demands associated with mortgage insurance rescission activity.

Because we typically retain the servicing for the mortgage loans we sell or securitize, we believe the quality of our residential mortgage loan servicing portfolio provides helpful information in evaluating our repurchase liability. Of the $1.5 trillion in the residential mortgage loan servicing portfolio at March 31, 2018 , 96% was current and less than 1% was subprime at origination. Our combined delinquency and foreclosure rate on this portfolio was 4.08% at March 31, 2018 , compared with 5.14% at December 31, 2017 . Two percent of this portfolio is private label securitizations for which we originated the loans and, therefore, have some repurchase risk.

The overall level of unresolved repurchase demands and mortgage insurance rescissions outstanding at March 31, 2018 , was $217 million , representing 1,068 loans, up from a year ago both in number of outstanding loans and in total dollar balances. The increase was predominantly due to private investor demands which we expect to resolve with minimal repurchase risk.

Our liability for mortgage repurchases, included in "Accrued expenses and other liabilities" in our consolidated balance sheet, represents our best estimate of the probable loss that we expect to incur for various representations and warranties in the contractual provisions of our sales of mortgage loans. The liability was $181 million at both March 31, 2018 , and December 31, 2017 . In first quarter 2018 , we recorded a provision of $4 million mostly due to loan sales, which decreased net gains on mortgage loan origination/sales activities, compared with no provision in first quarter 2017 . We incurred net losses on repurchased loans and investor reimbursements totaling $4 million in first quarter 2018 and $7 million in first quarter 2017 .

Because of the uncertainty in the various estimates underlying the mortgage repurchase liability, there is a range of losses in excess of the recorded mortgage repurchase liability that are reasonably possible. The estimate of the range of possible loss for representations and warranties does not represent a probable loss, and is based on currently available information, significant judgment, and a number of assumptions that are subject to change. The high end of this range of reasonably possible losses exceeded our recorded liability by $166 million at March 31, 2018 , and was determined based upon modifying the assumptions (particularly to assume significant changes in investor repurchase demand practices) used in our best estimate of probable loss to reflect what we believe to be the high end of reasonably possible adverse assumptions.

For additional information on our repurchase liability, see the "Risk Management – Credit Risk Management – Liability For Mortgage Loan Repurchase Losses" section in our 2017 Form 10-K and Note 10 (Mortgage Banking Activities) to Financial Statements in this Report.


RISKS RELATING TO SERVICING ACTIVITIES In addition to servicing loans in our portfolio, we act as servicer and/or master servicer of residential mortgage loans included in GSE-guaranteed mortgage securitizations, GNMA-guaranteed mortgage securitizations of FHA-insured/VA-guaranteed mortgages and private label mortgage securitizations, as well as for unsecuritized loans owned by institutional investors. In connection with our servicing activities, we could become subject to consent orders and settlement agreements with federal and state regulators for alleged servicing issues and practices. In general, these can require us to provide customers with loan modification relief, refinancing relief, and foreclosure prevention and assistance, as well as can impose certain monetary penalties on us.

For additional information about the risks related to our servicing activities, see the "Risk Management – Credit Risk Management – Risks Relating to Servicing Activities" section in our 2017 Form 10-K.




42

Asset/Liability Management ( continued )


Asset/Liability Management

Asset/liability management involves evaluating, monitoring and managing interest rate risk, market risk, liquidity and funding. Primary oversight of interest rate risk and market risk resides with the Finance Committee of our Board of Directors (Board), which oversees the administration and effectiveness of financial risk management policies and processes used to assess and manage these risks. Primary oversight of liquidity and funding resides with the Risk Committee of the Board. At the management level we utilize a Corporate Asset/Liability Management Committee (Corporate ALCO), which consists of senior financial, risk, and business executives, to oversee these risks and report on them periodically to the Board's Finance Committee and Risk Committee as appropriate. As discussed in more detail for market risk activities below, we employ separate management level oversight specific to market risk.

INTEREST RATE RISK Interest rate risk, which potentially can have a significant earnings impact, is an integral part of being a financial intermediary. We are subject to interest rate risk because:

assets and liabilities may mature or reprice at different times (for example, if assets reprice faster than liabilities and interest rates are generally rising, earnings will initially increase);

assets and liabilities may reprice at the same time but by different amounts (for example, when the general level of interest rates is rising, we may increase rates paid on checking and savings deposit accounts by an amount that is less than the general rise in market interest rates);

short-term and long-term market interest rates may change by different amounts (for example, the shape of the yield curve may affect new loan yields and funding costs differently);

the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change (for example, if long-term mortgage interest rates increase sharply, MBS held in the debt securities portfolio may pay down slower than anticipated, which could impact portfolio income); or

interest rates may also have a direct or indirect effect on loan demand, collateral values, credit losses, mortgage origination volume, the fair value of MSRs and other financial instruments, the value of the pension liability and other items affecting earnings.


We assess interest rate risk by comparing outcomes under various net interest income simulations using many interest rate scenarios that differ in the direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. These simulations require assumptions regarding drivers of earnings and balance sheet composition such as loan originations, prepayment speeds on loans and debt securities, deposit flows and mix, as well as pricing strategies.

Currently, our profile is such that we project net interest income will benefit modestly from higher interest rates as our assets would reprice faster and to a greater degree than our liabilities, while in the case of lower interest rates, our assets would reprice downward and to a greater degree than our liabilities.

Our most recent simulations estimate net interest income sensitivity over the next two years under a range of both lower and higher interest rates. Measured impacts from standardized ramps (gradual changes) and shocks (instantaneous changes) are summarized in Table 29 , indicating net interest income sensitivity relative to the Company's base net interest income

plan. Ramp scenarios assume interest rates move gradually in parallel across the yield curve relative to the base scenario in year one, and the full amount of the ramp is held as a constant differential to the base scenario in year two. The following describes the simulation assumptions for the scenarios presented in Table 29 :

Simulations are dynamic and reflect anticipated growth across assets and liabilities.

Other macroeconomic variables that could be correlated with the changes in interest rates are held constant.

Mortgage prepayment and origination assumptions vary across scenarios and reflect only the impact of the higher or lower interest rates.

Our base scenario deposit forecast incorporates mix changes consistent with the base interest rate trajectory. Deposit mix is modeled to be the same as in the base scenario across the alternative scenarios. In higher rate scenarios, customer activity that shifts balances into higher-yielding products could reduce expected net interest income.

We hold the size of the projected debt and equity securities portfolios constant across scenarios.

Table 29: Net Interest Income Sensitivity Over Next Two-Year Horizon Relative to Base Expectation

Lower Rates

Higher Rates

($ in billions)

Base

100 bps

Ramp

Parallel

 Decrease

100 bps Instantaneous

Parallel

Increase

200 bps

Ramp

Parallel

Increase

First Year of Forecasting Horizon

Net Interest Income Sensitivity to Base Scenario

$

(1.4) - (0.9)

1.7 - 2.2

1.6 - 2.1

Key Rates at Horizon End

Fed Funds Target

2.59

%

1.59

3.59

4.59

10-year CMT (1)

3.56

2.56

4.56

5.56

Second Year of Forecasting Horizon

Net Interest Income Sensitivity to Base Scenario

$

(2.7) - (2.2)

2.2 - 2.7

4.0 - 4.5

Key Rates at Horizon End

Fed Funds Target

2.75

%

1.75

3.75

4.75

10-year CMT (1)

3.83

2.83

4.83

5.83

(1)

U.S. Constant Maturity Treasury Rate


The sensitivity results above do not capture interest rate sensitive noninterest income and expense impacts. Our interest rate sensitive noninterest income and expense is primarily driven by mortgage activity, and may move in the opposite direction of our net interest income. Typically, in response to higher interest rates, mortgage activity, primarily refinancing activity, generally declines. And in response to lower interest rates, mortgage activity generally increases. Mortgage results are also impacted by the valuation of MSRs and related hedge positions. See the "Risk Management – Asset/Liability Management – Mortgage Banking Interest Rate and Market Risk" section in this Report for more information.

We use the debt securities portfolio and exchange-traded and over-the-counter (OTC) interest rate derivatives to hedge our interest rate exposures. See the "Balance Sheet Analysis – Available-for-Sale and Held-to-Maturity Debt Securities" section in this Report for more information on the use of the available-for-sale and held-to-maturity securities portfolios. The notional or contractual amount, credit risk amount and fair value of the derivatives used to hedge our interest rate risk exposures as of


43


March 31, 2018 , and December 31, 2017 , are presented in Note 14 (Derivatives) to Financial Statements in this Report. We use derivatives for asset/liability management in two main ways:

to convert the cash flows from selected asset and/or liability instruments/portfolios including investments, commercial loans and long-term debt, from fixed-rate payments to floating-rate payments, or vice versa; and

to economically hedge our mortgage origination pipeline, funded mortgage loans and MSRs using interest rate swaps, swaptions, futures, forwards and options.

MORTGAGE BANKING INTEREST RATE AND MARKET RISK  We originate, fund and service mortgage loans, which subjects us to various risks, including credit, liquidity and interest rate risks. For more information on mortgage banking interest rate and market risk, see the "Risk Management – Asset/Liability Management – Mortgage Banking Interest Rate and Market Risk" section in our 2017 Form 10-K.

While our hedging activities are designed to balance our mortgage banking interest rate risks, the financial instruments we use may not perfectly correlate with the values and income being hedged. For example, the change in the value of ARM production held for sale from changes in mortgage interest rates may or may not be fully offset by LIBOR index-based financial instruments used as economic hedges for such ARMs. Additionally, hedge-carry income on our economic hedges for the MSRs may not continue at recent levels if the spread between short-term and long-term rates decreases or there are other changes in the market for mortgage forwards that affect the implied carry.

The total carrying value of our residential and commercial MSRs was $ 16.5 billion at March 31, 2018 , and $ 15.0 billion at December 31, 2017 . The weighted-average note rate on our portfolio of loans serviced for others was 4.24% at March 31, 2018 , and 4.23% at December 31, 2017 . The carrying value of our total MSRs represented 0.96% of mortgage loans serviced for others at March 31, 2018 , and 0.88% of mortgage loans serviced for others at December 31, 2017 .

MARKET RISK Market risk is the risk of loss in the trading book associated with adverse changes in market risk factors such as interest rates, credit spreads, foreign exchange rates, equity, and commodity prices. The Finance Committee of our Board reviews the acceptable market risk appetite for our trading activities.


MARKET RISK – TRADING ACTIVITIES We engage in trading activities to accommodate the investment and risk management activities of our customers and to execute economic hedging to manage certain balance sheet risks. These trading activities predominantly occur within our Wholesale Banking businesses and to a lesser extent other divisions of the Company. Debt securities held for trading, equity securities held for trading, trading loans and trading derivatives are financial instruments used in our trading activities, and all are carried at fair value. Income earned on the financial instruments used in our trading activities include net interest income, changes in fair value and realized gains and losses. Net interest income earned from our trading activities is reflected in the interest income and interest expense components of our income statement. Changes in fair value of the financial instruments used in our trading activities are reflected in net gains on trading activities, a component of noninterest income in our income statement. For more information on the financial instruments used in our trading activities and the income from these trading activities, see Note 4 (Trading Activities) to Financial Statements in this Report.

The Company uses value-at-risk (VaR) metrics complemented with sensitivity analysis and stress testing in measuring and monitoring market risk. VaR is a statistical risk measure used to estimate the potential loss from adverse moves in the financial markets. For more information, see the "Risk Management – Asset/Liability Management – Market Risk – Trading Activities" section in our 2017 Form 10-K.

Trading VaR is the measure used to provide insight into the market risk exhibited by the Company's trading positions. The

Company calculates Trading VaR for risk management purposes to establish line of business and Company-wide risk limits. Trading VaR is calculated based on all trading positions on our balance sheet.


44

Asset/Liability Management ( continued )


Table 30 shows the Company's Trading General VaR by risk category. As presented in Table 30 , average Company Trading General VaR was $ 17 million for the quarter ended March 31, 2018 , compared with $ 13 million for the quarter ended December 31, 2017 , and $26 million for the quarter ended

March 31, 2017. The increase in average Trading General VaR for the quarter ended March 31, 2018, was mainly driven by market volatility entering into the 1-year historical lookback period.

Table 30: Trading 1-Day 99% General VaR by Risk Category

Quarter ended

March 31, 2018

December 31, 2017

March 31, 2017

(in millions)

Period

end


Average


Low


High


Period
end


Average


Low


High


Period

end


Average


Low


High


Company Trading General VaR Risk Categories

Credit

$

14


14


10


18


12


16


11


28


27


25


19


30


Interest rate

15


13


7


21


13


10


6


17


22


18


13


23


Equity

14


13


10


16


10


11


10


14


10


12


9


17


Commodity

1


1


1


1


1


1


1


2


1


1


1


2


Foreign exchange

0


1


0


3


0


0


0


1


1


1


0


1


Diversification benefit (1)

(22

)

(25

)

(24

)

(25

)

(35

)

(31

)

Company Trading General VaR

$

22


17


12


13


26


26


(1)

The period-end VaR was less than the sum of the VaR components described above, which is due to portfolio diversification. The diversification effect arises because the risks are not perfectly correlated causing a portfolio of positions to usually be less risky than the sum of the risks of the positions alone. The diversification benefit is not meaningful for low and high metrics since they may occur on different days.


Market Risk Governance, Measurement, Monitoring and Model Risk Management We employ a well-defined and structured market risk governance process and market risk measurement process, which incorporates VaR measurements combined with sensitivity analysis and stress testing to help us monitor our market risk. These monitoring measurements require the use of market risk models, which we govern by our Corporate Model Risk policies and procedures. For more information on our governance, measurement, monitoring, and model risk management practices, see the "Risk Management – Asset/Liability Management – Market Risk – Trading Activities" section in our 2017 Form 10-K.


MARKET RISK – EQUITY SECURITIES We are directly and indirectly affected by changes in the equity markets. We make and manage direct investments in start-up businesses, emerging growth companies, management buy-outs, acquisitions and corporate recapitalizations. We also invest in non-affiliated funds that make similar private equity investments. These private equity investments are made within capital allocations approved by management and the Board. The Board's policy is to review business developments, key risks and historical returns for the private equity investment portfolio at least annually. Management reviews these investments at least quarterly and assesses them for possible OTTI and observable price changes. For nonmarketable equity securities, the analysis is based on facts and circumstances of each individual investment and the expectations for that investment's cash flows, capital needs, the viability of its business model, our exit strategy, and observable price changes that are similar to the investment held. Investments in nonmarketable equity securities include private equity investments accounted for under the equity method, fair value through net income, and the measurement alternative.

In conjunction with the March 2008 initial public offering (IPO) of Visa, Inc. (Visa), we received approximately 20.7 million shares of Visa Class B common stock, the class which was apportioned to member banks of Visa at the time of the IPO. To manage our exposure to Visa and realize the value of the appreciated Visa shares, we incrementally sold these shares

through a series of sales, thereby eliminating this position as of September 30, 2015. As part of these sales, we agreed to compensate the buyer for any additional contributions to a litigation settlement fund for the litigation matters associated with the Class B shares we sold. Our exposure to this retained litigation risk has been updated quarterly and is reflected on our balance sheet. For additional information about the associated litigation matters, see the "Interchange Litigation" section in Note 13 (Legal Actions) to Financial Statements in this Report.

As part of our business to support our customers, we trade public equities, listed/OTC equity derivatives and convertible bonds. We have parameters that govern these activities. We also have marketable equity securities that include investments relating to our venture capital activities. We manage these marketable equity securities within capital risk limits approved by management and the Board and monitored by Corporate ALCO and the Market Risk Committee. The fair value changes in these marketable equity securities are recognized in net income. For more information, see Note 7 (Equity Securities) to Financial Statements in this Report.

Changes in equity market prices may also indirectly affect our net income by (1) the value of third party assets under management and, hence, fee income, (2) borrowers whose ability to repay principal and/or interest may be affected by the stock market, or (3) brokerage activity, related commission income and other business activities. Each business line monitors and manages these indirect risks.





45


LIQUIDITY AND FUNDING The objective of effective liquidity management is to ensure that we can meet customer loan requests, customer deposit maturities/withdrawals and other cash commitments efficiently under both normal operating conditions and under periods of Wells Fargo-specific and/or market stress. To achieve this objective, the Board of Directors establishes liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. These guidelines are monitored on a monthly basis by the Corporate ALCO and on a quarterly basis by the Board of Directors. These guidelines are established and monitored for both the consolidated company and for the Parent on a stand-alone basis to ensure that the Parent is a source of strength for its regulated, deposit-taking banking subsidiaries.


Liquidity Standards In September 2014, the FRB, OCC and FDIC issued a final rule that implements a quantitative liquidity requirement consistent with the liquidity coverage ratio (LCR) established by the Basel Committee on Banking Supervision (BCBS). The rule requires banking institutions, such as Wells Fargo, to hold high-quality liquid assets (HQLA), such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash, in an amount equal to or greater than its projected net cash outflows during a 30-day stress period. The rule is applicable to the Company on a consolidated basis and to our insured depository institutions with total assets greater than $10 billion. In addition, the FRB finalized rules imposing enhanced liquidity management standards on large bank holding companies (BHC) such as Wells Fargo, and has finalized a rule that requires large bank holding companies to publicly disclose on a quarterly basis certain quantitative and qualitative information regarding their LCR calculations.

The FRB, OCC and FDIC have proposed a rule that would implement a stable funding requirement, the net stable funding ratio (NSFR), which would require large banking organizations, such as Wells Fargo, to maintain a sufficient amount of stable funding in relation to their assets, derivative exposures and commitments over a one-year horizon period.


Liquidity Coverage Ratio As of March 31, 2018 , the consolidated Company and Wells Fargo Bank, N.A. were above

the minimum LCR requirement of 100%, which is calculated as HQLA divided by projected net cash outflows, as each is defined under the LCR rule. Table 31 presents the Company's quarterly average values for the daily-calculated LCR and its components calculated pursuant to the LCR rule requirements.


Table 31: Liquidity Coverage Ratio

(in millions)

Average for Quarter ended March 31, 2018


HQLA (1)(2)

$

380,570


Projected net cash outflows

309,578


LCR

123

%

HQLA in excess of projected net cash outflows

$

70,992


(1) Excludes excess HQLA at Wells Fargo Bank, N.A.

(2) Net of applicable haircuts required under the LCR rule.

Liquidity Sources We maintain liquidity in the form of cash, cash equivalents and unencumbered high-quality, liquid debt securities. These assets make up our primary sources of liquidity which are presented in Table 32 . Our primary sources of liquidity are substantially the same in composition as HQLA under the LCR rule; however, our primary sources of liquidity will generally exceed HQLA calculated under the LCR rule due to the applicable haircuts to HQLA and the exclusion of excess HQLA at our subsidiary insured depository institutions required under the LCR rule.

Our cash is predominantly on deposit with the Federal Reserve. Debt securities included as part of our primary sources of liquidity are comprised of U.S. Treasury and federal agency debt, and mortgage-backed securities issued by federal agencies within our debt securities portfolio. We believe these debt securities provide quick sources of liquidity through sales or by pledging to obtain financing, regardless of market conditions. Some of these debt securities are within the held-to-maturity portion of our debt securities portfolio and as such are not intended for sale but may be pledged to obtain financing. Some of the legal entities within our consolidated group of companies are subject to various regulatory, tax, legal and other restrictions that can limit the transferability of their funds. We believe we maintain adequate liquidity for these entities in consideration of such funds transfer restrictions.

Table 32: Primary Sources of Liquidity

March 31, 2018

December 31, 2017

(in millions)

Total


Encumbered


Unencumbered


Total


Encumbered


Unencumbered


Interest-earning deposits with banks

$

184,250


-


184,250


$

192,580


-


192,580


Debt securities of U.S. Treasury and federal agencies

50,458


780


49,678


51,125


964


50,161


Mortgage-backed securities of federal agencies (1)

243,664


38,517


205,147


246,894


46,062


200,832


Total

$

478,372


39,297


439,075


$

490,599


47,026


443,573


(1)

Included in encumbered debt securities at March 31, 2018 , were debt securities with a fair value of $187 million which were purchased in March 2018, but settled in April 2018.


In addition to our primary sources of liquidity shown in Table 32 , liquidity is also available through the sale or financing of other debt securities including trading and/or available-for-sale debt securities, as well as through the sale, securitization or financing of loans, to the extent such debt securities and loans are not encumbered. In addition, other debt securities in our held-to-maturity portfolio, to the extent not encumbered, may be pledged to obtain financing.

Deposits have historically provided a sizable source of relatively low-cost funds. Deposits were 138% of total loans at March 31, 2018 and 140% at December 31, 2017 .

Additional funding is provided by long-term debt and short-term borrowings. We access domestic and international capital markets for long-term funding (generally greater than one year) through issuances of registered debt securities, private placements and asset-backed secured funding.


46

Asset/Liability Management ( continued )


Table 33 shows selected information for short-term borrowings, which generally mature in less than 30 days.

Table 33: Short-Term Borrowings

Quarter ended

(in millions)

Mar 31
2018


Dec 31,
2017


Sep 30,
2017


Jun 30,
2017


Mar 31,
2017


Balance, period end

Federal funds purchased and securities sold under agreements to repurchase

$

80,916


88,684


79,824


78,683


76,366


Commercial paper

-


-


-


11


10


Other short-term borrowings

16,291


14,572


13,987


16,662


18,495


Total

$

97,207


103,256


93,811


95,356


94,871


Average daily balance for period

Federal funds purchased and securities sold under agreements to repurchase

$

86,535


88,197


81,980


79,826


79,942


Commercial paper

-


-


4


10


51


Other short-term borrowings

15,244


13,945


17,209


15,927


18,556


Total

$

101,779


102,142


99,193


95,763


98,549


Maximum month-end balance for period

Federal funds purchased and securities sold under agreements to repurchase (1)

$

88,121


91,604


83,260


78,683


81,284


Commercial paper (2)

-


-


11


11


78


Other short-term borrowings (3)

16,924


14,948


18,301


18,281


19,439


(1)

Highest month-end balance in each of the last five quarters was in January 2018, and November, August, June and February 2017.

(2)

There were no month-end balances in first quarter 2018 and fourth quarter 2017; highest month-end balance in each of the remaining three quarters was in July, June and January 2017.

(3)

Highest month-end balance in each of the last five quarters was in January 2018, and November, July, April and February 2017.

Long-Term Debt We issue long-term debt in a variety of maturities and currencies to achieve cost-efficient funding and to maintain an appropriate maturity profile. Long-term debt of $227.3 billion at March 31, 2018 , increased $2.3 billion from December 31, 2017 . We issued $15.5 billion of long-term debt in

first quarter 2018. Table 34 provides the aggregate carrying value of long-term debt maturities (based on contractual payment dates) for the remainder of 2018 and the following years thereafter, as of March 31, 2018 .

Table 34: Maturity of Long-Term Debt

March 31, 2018

(in millions)

Remaining 2018


2019


2020


2021


2022


Thereafter


Total


Wells Fargo & Company (Parent Only)

Senior notes

$

2,457


6,810


13,364


17,970


18,369


52,651


111,621


Subordinated notes

627


-


-


-


-


25,591


26,218


Junior subordinated notes

-


-


-


-


-


1,609


1,609


Total long-term debt - Parent

$

3,084


6,810


13,364


17,970


18,369


79,851


139,448


Wells Fargo Bank, N.A. and other bank entities (Bank)

Senior notes

$

23,404


30,946


5,502


11,715


41


196


71,804


Subordinated notes

-


-


-


-


-


5,319


5,319


Junior subordinated notes

-


-


-


-


-


345


345


Securitizations and other bank debt

1,795


1,056


1,160


206


114


2,713


7,044


Total long-term debt - Bank

$

25,199


32,002


6,662


11,921


155


8,573


84,512


Other consolidated subsidiaries

Senior notes

$

776


1,157


-


973


-


386


3,292


Securitizations and other bank debt

50


-


-


-


-


-


50


Total long-term debt - Other consolidated subsidiaries

$

826


1,157


-


973


-


386


3,342


Total long-term debt

$

29,109


39,969


20,026


30,864


18,524


88,810


227,302


Parent In February 2017, the Parent filed a registration statement with the SEC for the issuance of senior and subordinated notes, preferred stock and other securities. The Parent's ability to issue debt and other securities under this registration statement is limited by the debt issuance authority granted by the Board. As of March 31, 2018 , the Parent

was authorized by the Board to issue up to $180 billion in outstanding long-term debt. The Parent's long-term debt issuance authority granted by the Board includes debt issued to affiliates and others. At March 31, 2018 , the Parent had available $14.4 billion in long-term debt issuance authority. During the first three months of 2018, the Parent issued $109 million of


47


senior notes, of which $104 million were registered with the SEC. The Parent's short-term debt issuance authority granted by the Board was limited to debt issued to affiliates, and was revoked by the Board at management's request in January 2018.

The Parent's proceeds from securities issued were used for general corporate purposes, and, unless otherwise specified in the applicable prospectus or prospectus supplement, we expect the proceeds from securities issued in the future will be used for the same purposes. Depending on market conditions, we may purchase our outstanding debt securities from time to time in privately negotiated or open market transactions, by tender offer, or otherwise.


Wells Fargo Bank, N.A. As of March 31, 2018 , Wells Fargo Bank, N.A. was authorized by its board of directors to issue $100 billion  in outstanding short-term debt and $175 billion in outstanding long-term debt and had available $97.3 billion in short-term debt issuance authority and $101.9 billion in long-term debt issuance authority. In April 2018, Wells Fargo Bank, N.A. replaced its prior bank note program with a $100 billion bank note program under which, subject to any other debt outstanding under the limits described above, it may issue $50 billion in outstanding short-term senior notes and $50 billion in outstanding long-term senior or subordinated notes. At March 31, 2018 , Wells Fargo Bank, N.A. had remaining issuance capacity under the prior bank note program of $50.0 billion in short-term senior notes and $36.0 billion in long-term senior or subordinated notes. During the first three months of 2018, Wells Fargo Bank, N.A. issued $6.8 billion of unregistered senior notes, none of which were issued under the bank note program. In addition, during the first three months of 2018, Wells Fargo Bank, N.A. executed advances of $10.5 billion with the Federal Home Loan Bank of Des Moines, and as of March 31, 2018, Wells Fargo Bank, N.A. had outstanding advances of $54.8 billion across the Federal Home Loan Bank

System. In addition, in April 2018, Wells Fargo Bank, N.A. executed $2.5 billion of Federal Home Loan Bank advances.


Credit Ratings Investors in the long-term capital markets, as well as other market participants, generally will consider, among other factors, a company's debt rating in making investment decisions. Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, the level and quality of earnings, and rating agency assumptions regarding the probability and extent of federal financial assistance or support for certain large financial institutions. Adverse changes in these factors could result in a reduction of our credit rating; however, our debt securities do not contain credit rating covenants.

On February 6, 2018, Moody's Investors Service (Moody's) affirmed the Company's ratings and revised the ratings outlook from stable to negative. On February 7, 2018, Standard and Poor's Rating Services (S&P) downgraded the Company's ratings by one notch and revised the ratings outlook from negative to stable. There were no other significant actions undertaken by the rating agencies with regard to our ratings during first quarter 2018. Both the Parent and Wells Fargo Bank, N.A. remain among the top-rated financial firms in the U.S.

See the "Risk Factors" section in our 2017 Form 10-K for additional information regarding our credit ratings and the potential impact a credit rating downgrade would have on our liquidity and operations, as well as Note 14 (Derivatives) to Financial Statements in this Report for information regarding additional collateral and funding obligations required for certain derivative instruments in the event our credit ratings were to fall below investment grade.

The credit ratings of the Parent and Wells Fargo Bank, N.A. as of March 31, 2018 , are presented in Table 35 .


Table 35: Credit Ratings as of March 31, 2018

Wells Fargo & Company

Wells Fargo Bank, N.A.

Senior debt

Short-term

borrowings 

Long-term

deposits 

Short-term

borrowings 

Moody's

A2

P-1

Aa1

P-1

S&P

A-

A-2

A+

A-1

Fitch Ratings, Inc.

A+

F1

AA

F1+

DBRS

AA (low)

R-1 (middle)

AA

R-1 (high)

FEDERAL HOME LOAN BANK MEMBERSHIP The Federal Home Loan Banks (the FHLBs) are a group of cooperatives that lending institutions use to finance housing and economic development in local communities. We are a member of the FHLBs based in Dallas, Des Moines and San Francisco. Each member of the FHLBs is required to maintain a minimum investment in capital stock of the applicable FHLB. The board of directors of each FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Board. Because the extent of any obligation to increase our investment in any of the FHLBs depends entirely upon the occurrence of a future event, potential future payments to the FHLBs are not determinable.



48

Capital Management ( continued )


Capital Management


We have an active program for managing capital through a comprehensive process for assessing the Company's overall capital adequacy. Our objective is to maintain capital at an amount commensurate with our risk profile and risk tolerance objectives, and to meet both regulatory and market expectations. We primarily fund our capital needs through the retention of earnings net of both dividends and share repurchases, as well as through the issuance of preferred stock and long and short-term debt. Retained earnings increased $2.7 billion from December 31, 2017 , predominantly from Wells Fargo net income of $5.1 billion , less common and preferred stock dividends of $2.3 billion . During first quarter 2018 , we issued 32.8 million shares of common stock. During first quarter 2018 , we repurchased 50.6 million shares of common stock in open market transactions, private transactions and from employee benefit plans, at a cost of $3.0 billion . We entered into a $1 billion forward repurchase contract with an unrelated third party in April 2018 that is expected to settle in third quarter 2018 for approximately 20 million shares. For additional information about our forward repurchase agreements, see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in this Report.

Regulatory Capital Guidelines

The Company and each of our insured depository institutions are subject to various regulatory capital adequacy requirements administered by the FRB and the OCC. Risk-based capital (RBC) guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures as discussed below.


RISK-BASED CAPITAL AND RISK-WEIGHTED ASSETS The Company is subject to final and interim final rules issued by federal banking regulators to implement Basel III capital requirements for U.S. banking organizations. These rules are based on international guidelines for determining regulatory capital issued by the Basel Committee on Banking Supervision (BCBS). The federal banking regulators' capital rules, among other things, require on a fully phased-in basis:

a minimum Common Equity Tier 1 (CET1) ratio of 9.0%, comprised of a 4.5% minimum requirement plus a capital conservation buffer of 2.5% and for us, as a global systemically important bank (G-SIB), a capital surcharge to be calculated annually, which is 2.0% based on our year-end 2016 data;

a minimum tier 1 capital ratio of 10.5%, comprised of a 6.0% minimum requirement plus the capital conservation buffer of 2.5% and the G-SIB capital surcharge of 2.0%;

a minimum total capital ratio of 12.5%, comprised of a 8.0% minimum requirement plus the capital conservation buffer of 2.5% and the G-SIB capital surcharge of 2.0%;

a potential countercyclical buffer of up to 2.5% to be added to the minimum capital ratios, which is currently not in effect but could be imposed by regulators at their discretion if it is determined that a period of excessive credit growth is contributing to an increase in systemic risk;

a minimum tier 1 leverage ratio of 4.0%; and

a minimum supplementary leverage ratio (SLR) of 5.0% (comprised of a 3.0% minimum requirement plus a supplementary leverage buffer of 2.0%) for large and internationally active bank holding companies (BHCs).



49


We were required to comply with the final Basel III capital rules beginning January 2014, with certain provisions subject to phase-in periods. Beginning January 1, 2018, the requirements for calculating CET1 and tier 1 capital, along with RWAs, were fully phased-in. The entire Basel III capital rules are scheduled to be fully phased in by the end of 2021. The Basel III capital rules contain two frameworks for calculating capital requirements, a Standardized Approach, which replaced Basel I, and an Advanced Approach applicable to certain institutions, including Wells Fargo. Accordingly, in the assessment of our capital adequacy, we must report the lower of our CET1, tier 1 and total capital ratios calculated under the Standardized Approach and under the Advanced Approach.

On April 10, 2018, the FRB issued a proposed rule that would add a stress capital buffer and a stress leverage buffer to the minimum capital and tier 1 leverage ratio requirements. The buffers would be calculated based on the decrease in a financial institution's risk-based capital and tier 1 leverage ratios under the supervisory severely adverse scenario in CCAR, plus four quarters of planned common stock dividends. The stress capital buffer would replace the 2.5% capital conservation buffer under the Standardized Approach, whereas the stress leverage buffer would be added to the current 4% minimum tier 1 leverage ratio.

Because the Company has been designated as a G-SIB, we are also subject to the FRB's rule implementing the additional capital surcharge of between 1.0-4.5% on G-SIBs. Under the rule, we must annually calculate our surcharge under two methods and use the higher of the two surcharges. The first method (method one) considers our size, interconnectedness, cross-jurisdictional

activity, substitutability, and complexity, consistent with the methodology developed by the BCBS and the Financial Stability Board (FSB). The second (method two) uses similar inputs, but replaces substitutability with use of short-term wholesale funding and will generally result in higher surcharges than the BCBS methodology. The phase-in period for the G-SIB surcharge began on January 1, 2016 and will become fully effective on January 1, 2019. Based on year-end 2016 data, our 2018 G-SIB surcharge under method two is 2.0% of the Company's RWAs, which is the higher of method one and method two. Because the G-SIB surcharge is calculated annually based on data that can differ over time, the amount of the surcharge is subject to change in future years. Under the Standardized Approach (fully phased-in), our CET1 ratio of 11.92% exceeded the minimum of 9.0% by 292 basis points at March 31, 2018 .

The tables that follow provide information about our risk- based capital and related ratios as calculated under Basel III capital guidelines. For banking industry regulatory reporting purposes, we continue to report our tier 2 and total capital in accordance with Transition Requirements but are managing our capital based on a fully phased-in calculation. For information about our capital requirements calculated in accordance with Transition Requirements, see Note 22 (Regulatory and Agency Capital Requirements) to Financial Statements in this Report.

Table 36 summarizes our CET1, tier 1 capital, total capital, risk-weighted assets and capital ratios on a fully phased-in basis at March 31, 2018 and December 31, 2017 . As of March 31, 2018 , our CET1, tier 1, and total capital ratios were lower using RWAs calculated under the Standardized Approach.


Table 36: Capital Components and Ratios (Fully Phased-In)

March 31, 2018

December 31, 2017

(in millions, except ratios)

Advanced Approach


Standardized Approach


Advanced Approach


Standardized Approach


Common Equity Tier 1

(A)

$

152,304


152,304


154,022


154,022


Tier 1 Capital

(B)

175,810


175,810


177,466


177,466


Total Capital (1)

(C)

206,833


215,539


208,395


218,159


Risk-Weighted Assets

(D)

1,203,464


1,278,113


1,225,939


1,285,563


Common Equity Tier 1 Capital Ratio

(A)/(D)

12.66

%

11.92


*

12.56


11.98


*

Tier 1 Capital Ratio

(B)/(D)

14.61


13.76


*

14.48


13.80


*

Total Capital Ratio (1)

(C)/(D)

17.19



16.86


*

17.00


16.97


*

*Denotes the lowest capital ratio as determined under the Advanced and Standardized Approaches.

(1)

Fully phased-in total capital amounts and ratios are considered non-GAAP financial measures that are used by management, bank regulatory agencies, investors and analysts to assess and monitor the Company's capital position. See Table 37 for information regarding the calculation and components of CET1, tier 1 capital, total capital and RWAs, as well as the corresponding reconciliation of our fully phased-in regulatory capital amounts to GAAP financial measures.


50

Capital Management ( continued )


Table 37 provides information regarding the calculation and composition of our risk-based capital under the Advanced and Standardized Approaches at March 31, 2018 and December 31, 2017 .



Table 37: Risk-Based Capital Calculation and Components

March 31, 2018

December 31, 2017

(in millions)

Advanced Approach


Standardized Approach


Advanced Approach


Standardized Approach


Total equity

$

205,910


205,910


208,079


208,079


Adjustments:

Preferred stock

(26,227

)

(26,227

)

(25,358

)

(25,358

)

Additional paid-in capital on ESOP preferred stock

(146

)

(146

)

(122

)

(122

)

Unearned ESOP shares

2,571


2,571


1,678


1,678


Noncontrolling interests

(958

)

(958

)

(1,143

)

(1,143

)

Total common stockholders' equity


181,150


181,150


183,134


183,134


Adjustments:

Goodwill

(26,445

)

(26,445

)

(26,587

)

(26,587

)

Certain identifiable intangible assets (other than MSRs)

(1,357

)

(1,357

)

(1,624

)

(1,624

)

Other assets (1)

(2,388

)

(2,388

)

(2,155

)

(2,155

)

Applicable deferred taxes (2)

918


918


962


962


Investment in certain subsidiaries and other

426


426


292


292


Common Equity Tier 1 (Fully Phased-In)


152,304


152,304


154,022


154,022


Effect of Transition Requirements (3)

-


-


743


743


Common Equity Tier 1 (Transition Requirements)

$

152,304


152,304


154,765


154,765


Common Equity Tier 1 (Fully Phased-In)

$

152,304


152,304


154,022


154,022


Preferred stock

26,227


26,227


25,358


25,358


Additional paid-in capital on ESOP preferred stock

146


146


122


122


Unearned ESOP shares

(2,571

)

(2,571

)

(1,678

)

(1,678

)

Other

(296

)

(296

)

(358

)

(358

)

Total Tier 1 capital (Fully Phased-In)

(A)

175,810


175,810


177,466


177,466


Effect of Transition Requirements (3)

-


-


743


743


Total Tier 1 capital (Transition Requirements)

$

175,810


175,810


178,209


178,209


Total Tier 1 capital (Fully Phased-In)

$

175,810


175,810


177,466


177,466


Long-term debt and other instruments qualifying as Tier 2

28,621


28,621


28,994


28,994


Qualifying allowance for credit losses (4)

2,607


11,313


2,196


11,960


Other

(205

)

(205

)

(261

)

(261

)

Total Tier 2 capital (Fully Phased-In)

(B)

31,023


39,729


30,929


40,693


Effect of Transition Requirements

698


698


1,195


1,195


Total Tier 2 capital (Transition Requirements)

$

31,721


40,427


32,124


41,888


Total qualifying capital (Fully Phased-In)

(A)+(B)

$

206,833


215,539


208,395


218,159


Total Effect of Transition Requirements

698


698


1,938


1,938


Total qualifying capital (Transition Requirements)

$

207,531


216,237


210,333


220,097


Risk-Weighted Assets (RWAs) (5)(6):

Credit risk

$

855,243


1,238,517


890,171


1,249,395


Market risk

39,596


39,596


36,168


36,168


Operational risk

308,625


N/A


299,600


N/A


Total RWAs (Fully Phased-In) (3)

$

1,203,464


1,278,113


1,225,939


1,285,563


Credit risk

$

855,243


1,238,517


863,777


1,224,495


Market risk

39,596


39,596


36,168


36,168


Operational risk

308,625


N/A


299,600


N/A


Total RWAs (Transition Requirements)

$

1,203,464


1,278,113


1,199,545


1,260,663


(1)

Represents goodwill and other intangibles on nonmarketable equity securities, which are included in other assets.

(2)

Applicable deferred taxes relate to goodwill and other intangible assets. They were determined by applying the combined federal statutory rate and composite state income tax rates to the difference between book and tax basis of the respective goodwill and intangible assets at period end.

(3)

Beginning January 1, 2018, the requirements for calculating CET1 and tier 1 capital, along with RWAs, were fully phased-in, so the effect of the transition requirements was $0 at March 31, 2018.

(4)

Under the Advanced Approach the allowance for credit losses that exceeds expected credit losses is eligible for inclusion in Tier 2 Capital, to the extent the excess allowance does not exceed 0.6% of Advanced credit RWAs, and under the Standardized Approach, the allowance for credit losses is includable in Tier 2 Capital up to 1.25% of Standardized credit RWAs, with any excess allowance for credit losses being deducted from total RWAs.

(5)

RWAs calculated under the Advanced Approach utilize a risk-sensitive methodology, which relies upon the use of internal credit models based upon our experience with internal rating grades. Advanced Approach also includes an operational risk component, which reflects the risk of operating loss resulting from inadequate or failed internal processes or systems.

(6)

Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor, or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total RWAs.


51


Table 38 presents the changes in Common Equity Tier 1 under the Advanced Approach for the quarter ended March 31, 2018 .



Table 38: Analysis of Changes in Common Equity Tier 1

(in millions)

Common Equity Tier 1 (Fully Phased-In) at December 31, 2017

$

154,022


Net income applicable to common stock

4,733


Common stock dividends

(1,911

)

Common stock issued, repurchased, and stock compensation-related items

(2,124

)

Goodwill

142


Certain identifiable intangible assets (other than MSRs)

267


Other assets (1)

(233

)

Applicable deferred taxes (2)

(44

)

Investment in certain subsidiaries and other

(2,548

)

Change in Common Equity Tier 1

(1,718

)

Common Equity Tier 1 (Fully Phased-In) at March 31, 2018

$

152,304


(1)

Represents goodwill and other intangibles on nonmarketable equity securities, which are included in other assets.

(2)

Applicable deferred taxes relate to goodwill and other intangible assets. They were determined by applying the combined federal statutory rate and composite state income tax rates to the difference between book and tax basis of the respective goodwill and intangible assets at period end.


Table 39 presents net changes in the components of RWAs under the Advanced and Standardized Approaches for the quarter ended March 31, 2018 .



Table 39: Analysis of Changes in RWAs

(in millions)

Advanced Approach


Standardized Approach


RWAs (Fully Phased-In) at December 31, 2017

$

1,225,939


1,285,563


Net change in credit risk RWAs

(34,928

)

(10,878

)

Net change in market risk RWAs

3,428


3,428


Net change in operational risk RWAs

9,025


-


Total change in RWAs

(22,475

)

(7,450

)

RWAs (Fully Phased-In) at March 31, 2018

1,203,464


1,278,113


Effect of Transition Requirements (1)

-


-


RWAs (Transition Requirements) at March 31, 2018

$

1,203,464


1,278,113


(1)

Beginning January 1, 2018, the requirements for calculating CET1 and tier 1 capital, along with RWAs, were fully phased-in, so the effect of the transition requirements was $0 at March 31, 2018.



52

Capital Management ( continued )


TANGIBLE COMMON EQUITY We also evaluate our business based on certain ratios that utilize tangible common equity. Tangible common equity is a non-GAAP financial measure and represents total equity less preferred equity, noncontrolling interests, and goodwill and certain identifiable intangible assets (including goodwill and intangible assets associated with certain of our nonmarketable equity securities, but excluding mortgage servicing rights), net of applicable deferred taxes. These tangible common equity ratios are as follows:

Tangible book value per common share, which represents tangible common equity divided by common shares outstanding.

Return on average tangible common equity (ROTCE), which represents our annualized earnings contribution as a percentage of tangible common equity.


The methodology of determining tangible common equity may differ among companies. Management believes that tangible book value per common share and return on average tangible common equity, which utilize tangible common equity, are useful financial measures because they enable investors and others to assess the Company's use of equity.

Table 40 provides a reconciliation of these non-GAAP financial measures to GAAP financial measures.


Table 40: Tangible Common Equity

Balance at period end

Average balance

Quarter ended

Quarter ended

(in millions, except ratios)

Mar 31,
2018


Dec 31,
2017


Mar 31,
2017


Mar 31,
2018


Dec 31,
2017


Mar 31,
2017


Total equity

$

205,910


208,079


202,310


206,180


207,413


201,559


Adjustments:

Preferred stock

(26,227

)

(25,358

)

(25,501

)

(26,157

)

(25,569

)

(25,163

)

Additional paid-in capital on ESOP preferred stock

(146

)

(122

)

(157

)

(153

)

(129

)

(146

)

Unearned ESOP shares

2,571


1,678


2,546


2,508


1,896


2,198


Noncontrolling interests

(958

)

(1,143

)

(989

)

(997

)

(998

)

(957

)

Total common stockholders' equity

(A)

181,150


183,134


178,209


181,381


182,613


177,491


Adjustments:

Goodwill

(26,445

)

(26,587

)

(26,666

)

(26,516

)

(26,579

)

(26,673

)

Certain identifiable intangible assets (other than MSRs)

(1,357

)

(1,624

)

(2,449

)

(1,489

)

(1,767

)

(2,588

)

Other assets (1)

(2,388

)

(2,155

)

(2,121

)

(2,233

)

(2,245

)

(2,095

)

Applicable deferred taxes (2)

918


962


1,698


933


1,332


1,722


Tangible common equity

(B)

$

151,878


153,730


148,671


152,076


153,354


147,857


Common shares outstanding

(C)

4,873.9


4,891.6


4,996.7


N/A


N/A


N/A


Net income applicable to common stock (3)

(D)

N/A


N/A


N/A


$

4,733


5,740


5,233


Book value per common share

(A)/(C)

$

37.17


37.44


35.67


N/A


N/A


N/A


Tangible book value per common share

(B)/(C)

31.16


31.43


29.75


N/A


N/A


N/A


Return on average common stockholders' equity (ROE) (annualized)

(D)/(A)

N/A


N/A


N/A


10.58

%

12.47


11.96


Return on average tangible common equity (ROTCE) (annualized)

(D)/(B)

N/A


N/A


N/A


12.62


14.85


14.35


(1)

Represents goodwill and other intangibles on nonmarketable equity securities, which are included in other assets.

(2)

Applicable deferred taxes relate to goodwill and other intangible assets. They were determined by applying the combined federal statutory rate and composite state income tax rates to the difference between book and tax basis of the respective goodwill and intangible assets at period end.

(3)

Quarter ended net income applicable to common stock is annualized for the respective ROE and ROTCE ratios.


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SUPPLEMENTARY LEVERAGE RATIO In April 2014, federal banking regulators finalized a rule that enhances the SLR requirements for BHCs, like Wells Fargo, and their insured depository institutions. The SLR consists of Tier 1 capital divided by the Company's total leverage exposure. Total leverage exposure consists of the total average on-balance sheet assets, plus off-balance sheet exposures, such as undrawn commitments and derivative exposures, less amounts permitted to be deducted from Tier 1 capital. The rule, which became effective on January 1, 2018, requires a covered BHC to maintain a SLR of at least 5.0% (comprised of the 3.0% minimum requirement plus a supplementary leverage buffer of 2.0%) to avoid restrictions on capital distributions and discretionary bonus payments. The rule also requires that all of our insured depository institutions maintain a SLR of 6.0% under applicable regulatory capital adequacy guidelines. In April 2018, the FRB and OCC proposed rules (the "Proposed SLR Rules") that would replace the 2% supplementary leverage buffer with a buffer equal to one-half of the firm's G-SIB capital surcharge. The Proposed SLR Rules would similarly tailor the current 6% SLR requirement for our insured depository institutions. At March 31, 2018 , our SLR for the Company was 7.9% assuming full phase-in of the Advanced Approach capital framework. Based on our review, our current leverage levels would exceed the applicable requirements for each of our insured depository institutions as well. The fully phased-in SLR is considered a non-GAAP financial measure that is used by management, bank regulatory agencies, investors and analysts to assess and monitor the Company's leverage exposure. See Table 41 for information regarding the calculation and components of the SLR.

Table 41: Fully Phased-In SLR

(in millions, except ratio)

Three Months Ended March 31, 2018


Tier 1 capital

$

175,810


Total average assets

1,915,896


Less: deductions from Tier 1 capital (1)

29,688


Total adjusted average assets

1,886,208


Adjustments:

Derivative exposures (2)

69,987


Repo-style transactions (3)

3,229


Other off-balance sheet exposures (4)

253,212


Total adjustments

326,428


Total leverage exposure

$

2,212,636


Supplementary leverage ratio

7.9

%

(1)

Amounts permitted to be deducted from Tier 1 capital primarily include goodwill and other intangible assets, net of associated deferred tax liabilities.

(2)

Represents adjustments for off balance sheet derivative exposures, and derivative collateral netting as defined for supplementary leverage ratio determination purposes.

(3)

Adjustments for repo-style transactions represent counterparty credit risk for all repo-style transactions where Wells Fargo & Company is the principal (i.e., principal counterparty facing the client).

(4)

Adjustments for other off-balance sheet exposures represent the notional amounts of all off-balance sheet exposures (excluding off balance sheet exposures associated with derivative and repo-style transactions) less the adjustments for conversion to credit equivalent amounts under the regulatory capital rule.

OTHER REGULATORY CAPITAL MATTERS In December 2016, the FRB finalized rules to address the amount of equity and unsecured long-term debt a U.S. G-SIB must hold to improve its resolvability and resiliency, often referred to as Total Loss Absorbing Capacity (TLAC). Under the rules, which become effective on January 1, 2019, U.S. G-SIBs will be required to have a minimum TLAC amount (consisting of CET1 capital and

additional tier 1 capital issued directly by the top-tier or covered BHC plus eligible external long-term debt) equal to the greater of (i) 18% of RWAs and (ii) 7.5% of total leverage exposure (the denominator of the SLR calculation). Additionally, U.S. G-SIBs will be required to maintain (i) a TLAC buffer equal to 2.5% of RWAs plus the firm's applicable G-SIB capital surcharge calculated under method one plus any applicable countercyclical buffer that will be added to the 18% minimum and (ii) an external TLAC leverage buffer equal to 2.0% of total leverage exposure that will be added to the 7.5% minimum, in order to avoid restrictions on capital distributions and discretionary bonus payments. The rules will also require U.S. G-SIBs to have a minimum amount of eligible unsecured long-term debt equal to the greater of (i) 6.0% of RWAs plus the firm's applicable G-SIB capital surcharge calculated under method two and (ii) 4.5% of the total leverage exposure. In addition, the rules will impose certain restrictions on the operations and liabilities of the top-tier or covered BHC in order to further facilitate an orderly resolution, including prohibitions on the issuance of short-term debt to external investors and on entering into derivatives and certain other types of financial contracts with external counterparties. While the rules permit permanent grandfathering of a significant portion of otherwise ineligible long-term debt that was issued prior to December 31, 2016, long-term debt issued after that date must be fully compliant with the eligibility requirements of the rules in order to count toward the minimum TLAC amount. As a result of the rules, we will need to issue additional long-term debt to remain compliant with the requirements. Under the Proposed SLR Rules, the 2% external TLAC leverage buffer would be replaced with a buffer equal to one-half of the firm's G-SIB capital surcharge. Additionally, the Proposed SLR Rules would modify the leverage component for calculating the minimum amount of eligible unsecured long-term debt from 4.5% of total leverage exposure to 2.5% of total leverage exposure plus one-half of the firm's G-SIB capital surcharge. As of March 31, 2018 , we estimate that our eligible external TLAC as a percentage of total risk-weighted assets was 24.0% compared with an expected January 1, 2019 required minimum of 22.0%. Similar to the risk-based capital requirements, we determine minimum required TLAC based on the greater of RWAs determined under the Standardized and Advanced approaches.

In addition, as discussed in the "Risk Management – Asset/ Liability Management – Liquidity and Funding – Liquidity Standards" section in this Report, federal banking regulators have issued a final rule regarding the U.S. implementation of the Basel III LCR and a proposed rule regarding the NSFR.


Capital Planning and Stress Testing

Our planned long-term capital structure is designed to meet regulatory and market expectations. We believe that our long-term targeted capital structure enables us to invest in and grow our business, satisfy our customers' financial needs in varying environments, access markets, and maintain flexibility to return capital to our shareholders. Our long-term targeted capital structure also considers capital levels sufficient to exceed capital requirements including the G-SIB surcharge. Accordingly, based on the final Basel III capital rules under the lower of the Standardized or Advanced Approaches CET1 capital ratios, we currently target a long-term CET1 capital ratio at or in excess of 10%, which includes a 2% G-SIB surcharge. Our capital targets are subject to change based on various factors, including changes to the regulatory capital framework and expectations for large banks promulgated by bank regulatory agencies, planned capital actions, changes in our risk profile and other factors.


54

Capital Management ( continued )


Under the FRB's capital plan rule, large BHCs are required to submit capital plans annually for review to determine if the FRB has any objections before making any capital distributions. The rule requires updates to capital plans in the event of material changes in a BHC's risk profile, including as a result of any significant acquisitions. The FRB assesses the overall financial condition, risk profile, and capital adequacy of BHCs while considering both quantitative and qualitative factors when evaluating capital plans.

Our 2018 capital plan, which was submitted on April 4, 2018, as part of CCAR, included a comprehensive capital outlook supported by an assessment of expected sources and uses of capital over a given planning horizon under a range of expected and stress scenarios. As part of the 2018 CCAR, the FRB also generated a supervisory stress test, which assumed a sharp decline in the economy and significant decline in asset pricing using the information provided by the Company to estimate performance. The FRB is expected to review the supervisory stress results both as required under the Dodd-Frank Act using a common set of capital actions for all large BHCs and by taking into account the Company's proposed capital actions. The FRB has indicated that it will publish its supervisory stress test results as required under the Dodd-Frank Act, and the related CCAR results taking into account the Company's proposed capital actions, by June 30, 2018.

Federal banking regulators require stress tests to evaluate whether an institution has sufficient capital to continue to operate during periods of adverse economic and financial conditions. These stress testing requirements set forth the timing and type of stress test activities large BHCs and banks must undertake as well as rules governing stress testing controls, oversight and disclosure requirements. The rules also limit a large BHC's ability to make capital distributions to the extent its actual capital issuances were less than amounts indicated in its capital plan. As required under the FRB's stress testing rule, we must submit a mid-cycle stress test based on second quarter data and scenarios developed by the Company. We submitted the results of the mid-cycle stress test to the FRB and disclosed a summary of the results in October 2017.


Securities Repurchases

From time to time the Board authorizes the Company to repurchase shares of our common stock. Although we announce when the Board authorizes share repurchases, we typically do not give any public notice before we repurchase our shares. Future stock repurchases may be private or open-market repurchases, including block transactions, accelerated or delayed block transactions, forward transactions, and similar transactions. Additionally, we may enter into plans to purchase stock that satisfy the conditions of Rule 10b5-1 of the Securities Exchange Act of 1934. Various factors determine the amount and timing of our share repurchases, including our capital requirements, the number of shares we expect to issue for employee benefit plans and acquisitions, market conditions (including the trading price of our stock), and regulatory and legal considerations, including the FRB's response to our capital plan and to changes in our risk profile.

In January 2016, the Board authorized the repurchase of 350 million shares of our common stock. In January 2018, the Board authorized the repurchase of an additional 350 million shares of our common stock. At March 31, 2018 , we had remaining authority to repurchase approximately 370 million shares, subject to regulatory and legal conditions. For more information about share repurchases during first quarter 2018 , see Part II, Item 2 in this Report.

Historically, our policy has been to repurchase shares under the "safe harbor" conditions of Rule 10b-18 of the Securities Exchange Act of 1934 including a limitation on the daily volume of repurchases. Rule 10b-18 imposes an additional daily volume limitation on share repurchases during a pending merger or acquisition in which shares of our stock will constitute some or all of the consideration. Our management may determine that during a pending stock merger or acquisition when the safe harbor would otherwise be available, it is in our best interest to repurchase shares in excess of this additional daily volume limitation. In such cases, we intend to repurchase shares in compliance with the other conditions of the safe harbor, including the standing daily volume limitation that applies whether or not there is a pending stock merger or acquisition.

In connection with our participation in the Capital Purchase Program (CPP), a part of the Troubled Asset Relief Program (TARP), we issued to the U.S. Treasury Department warrants to purchase 110,261,688 shares of our common stock with an original exercise price of $34.01 per share expiring on October 28, 2018. The terms of the warrants require the exercise price to be adjusted under certain circumstances when the Company's quarterly common stock dividend exceeds $0.34 per share, which began occurring in second quarter 2014. Accordingly, with each quarterly common stock dividend above $0.34 per share, we must calculate whether an adjustment to the exercise price is required by the terms of the warrants, including whether certain minimum thresholds have been met to trigger an adjustment, and notify the holders of any such change. The Board authorized the repurchase by the Company of up to $1 billion of the warrants. At March 31, 2018 , there were 13,661,427 warrants outstanding, exercisable at $33.675 per share, and $452 million of unused warrant repurchase authority. Depending on market conditions, we may purchase from time to time additional warrants in privately negotiated or open market transactions, by tender offer or otherwise.



55


Regulatory Matters

Since the enactment of the Dodd-Frank Act in 2010, the U.S. financial services industry has been subject to a significant increase in regulation and regulatory oversight initiatives. This increased regulation and oversight has substantially changed how most U.S. financial services companies conduct business and has increased their regulatory compliance costs.

The following supplements our discussion of the significant regulations and regulatory oversight initiatives that have affected or may affect our business contained in the "Regulatory Matters" and "Risk Factors" sections in our 2017 Form 10-K.


REGULATION OF SWAPS AND OTHER DERIVATIVES ACTIVITIES The Dodd-Frank Act established a comprehensive framework for regulating over-the-counter derivatives and authorized the CFTC and the SEC to regulate swaps and security-based swaps, respectively. The CFTC has adopted rules applicable to our provisionally registered swap dealer, Wells Fargo Bank, N.A., that require, among other things, extensive regulatory and public reporting of swaps, central clearing and trading of swaps on exchanges or other multilateral platforms, and compliance with comprehensive internal and external business conduct standards. The SEC is expected to implement parallel rules applicable to security-based swaps. In addition, federal regulators have adopted final rules establishing margin requirements for swaps and security-based swaps not centrally cleared, and rules placing restrictions on a party's right to exercise default rights under derivatives and other qualified financial contracts against applicable banking organizations. All of these new rules, as well as others being considered by regulators in other jurisdictions, may negatively impact customer demand for over-the-counter derivatives and may increase our costs for engaging in swaps and other derivatives activities.


INVESTMENT ADVISOR AND BROKER-DEALER STANDARDS OF CONDUCT In April 2016, the U.S. Department of Labor adopted a rule under the Employee Retirement Income Security Act of 1974 (ERISA) that, among other changes and subject to certain exceptions, as of the applicability date of June 9, 2017, makes anyone, including broker-dealers, providing investment advice to retirement investors a fiduciary who must act in the best interest of clients when providing investment advice for direct or indirect compensation to a retirement plan, to a plan fiduciary, participant or beneficiary, or to an investment retirement account (IRA) or IRA holder. On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit struck down the Department of Labor's fiduciary standard rule in its entirety, holding that it exceeded the Department of Labor's authority. Unless subject to a stay or other proceeding in the interim, the Fifth Circuit's judgment will take effect on May 7, 2018. In addition, in April 2018, the SEC proposed a rule that would require broker-dealers to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities. Each of these rules may impact the manner in which business is conducted with customers seeking investment advice and may affect certain investment product offerings.


FRB CONSENT ORDER REGARDING GOVERNANCE OVERSIGHT AND COMPLIANCE AND OPERATIONAL RISK MANAGEMENT On February 2, 2018, the Company entered into a consent order with the FRB. As required by the consent order, the Board submitted to the FRB a plan to further enhance the Board's governance and oversight of the Company, and the Company submitted to the FRB a plan to further improve the Company's compliance and operational risk management program. As part of the review and approval process contemplated by the consent order, the Company will respond to any feedback provided by the FRB regarding the plans, including by making any necessary changes to the plans. The consent order also requires the Company, following the FRB's acceptance and approval of the plans and the Company's adoption and implementation of the plans, to complete by September 30, 2018, third-party reviews of the enhancements and improvements provided for in the plans. Until these third-party reviews are complete and the plans are approved and implemented to the satisfaction of the FRB, the Company's total consolidated assets will be limited to the level as of December 31, 2017. Compliance with this asset cap will be measured on a two-quarter daily average basis to allow for management of temporary fluctuations. Once the asset cap limitation is removed, a second third-party review must be conducted to assess the efficacy and sustainability of the improvements.


CONSENT ORDERS WITH THE CFPB AND OCC REGARDING COMPLIANCE RISK MANAGEMENT PROGRAM, AUTOMOBILE COLLATERAL PROTECTION INSURANCE POLICIES, AND MORTGAGE INTEREST RATE LOCK EXTENSIONS On April 20, 2018 we entered into consent orders with the CFPB and OCC to pay an aggregate of $1 billion in civil money penalties to resolve matters regarding our compliance risk management program and past practices involving certain automobile collateral protection insurance policies and certain mortgage interest rate lock extensions. The consent orders require that the Company submit to the CFPB and OCC, within 60 days of the date of the consent orders, an acceptable enterprise-wide compliance risk management plan and a plan to enhance the Company's internal audit program with respect to federal consumer financial law and the terms of the consent orders. The consent orders also require the Company to submit for non-objection, within 120 days of the date of the consent orders, plans for a remediation program regarding ongoing compliance with federal consumer financial law and, within 60 days of the date of the consent orders, plans to remediate customers affected by the automobile collateral protection insurance and mortgage interest rate lock matters.






56


Critical Accounting Policies

Our significant accounting policies (see Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2017 Form 10-K) are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. Five of these policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern:

the allowance for credit losses;

the valuation of residential MSRs;

the fair value of financial instruments;

income taxes; and

liability for contingent litigation losses.


Management and the Board's Audit and Examination Committee have reviewed and approved these critical accounting policies. These policies are described further in the "Financial Review – Critical Accounting Policies" section and Note 1 (Summary of Significant Accounting Policies) to Financial Statements in our 2017 Form 10-K.


57


Current Accounting Developments

Table 42 provides the significant accounting updates applicable to us that have been issued by the FASB but are not yet effective.


Table 42: Current Accounting Developments – Issued Standards

Standard

Description

Effective date and financial statement impact

Accounting Standards Update (ASU or Update) 2018-02 – Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

Currently, the effect of remeasuring deferred tax assets and liabilities due to a change in tax laws or rates must be recognized in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects were originally recognized in other comprehensive income. The Update permits a one-time reclassification from accumulated other comprehensive income to retained earnings for these stranded tax effects resulting from the Tax Cuts and Jobs Act.

The guidance is effective on January 1, 2019. Early application is permitted in any interim period prior to the effective date. An initial estimate of the application of the new guidance is expected to result in an increase in retained earnings of approximately $400 million.

    We were required to recognize various tax impacts of the Tax Cuts & Jobs Act (Tax Act) as of December 31, 2017, in accordance with ASC Topic 740, Income Taxes and SEC Staff Accounting Bulletin 118. Our income tax expense for 2017 reflected $3.7 billion of net estimated tax benefits related to the Tax Act, primarily as a result of re-measuring our deferred taxes for the federal tax rate reduction from 35% to 21%. Our initial accounting related to the re-measurement is incomplete, since the temporary difference calculations need to be finalized as we complete our U.S. tax filing during 2018. Accordingly, we expect to adopt ASU 2018-02 in fourth quarter 2018.

ASU 2017-08 – Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities

The Update changes the accounting for certain purchased callable debt securities held at a premium to shorten the amortization period for the premium to the earliest call date rather than to the maturity date. Accounting for purchased callable debt securities held at a discount does not change. The discount would continue to amortize to the maturity date.

We expect to adopt the guidance in first quarter 2019 using the modified retrospective method with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. Our debt securities portfolio includes holdings of available-for-sale (AFS) and held-to-maturity (HTM) callable debt securities held at a premium. At adoption, the guidance is expected to result in a cumulative effect adjustment which will be primarily offset with a corresponding adjustment to other comprehensive income related to AFS securities. After adoption, the guidance will reduce interest income prior to the call date because the premium will be amortized over a shorter time period. Our implementation effort includes identifying the population of debt securities subject to the new guidance, which are primarily obligations of U.S. states and political subdivisions, and quantifying the expected impacts. The impact of the Update on our consolidated financial statements will be affected by our portfolio composition at the time of adoption, which may change between the most recent balance sheet date and the adoption date.

ASU 2016-13 – Financial Instruments – Credit Losses (Topic 326):  Measurement of Credit Losses on Financial Instruments

The Update changes the accounting for credit losses on loans and debt securities. For loans and held-to-maturity debt securities, the Update requires a current expected credit loss (CECL) approach to determine the allowance for credit losses. CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. Also, the Update eliminates the existing guidance for PCI loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination. In addition, the Update modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit.

The guidance is effective in first quarter 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in first quarter 2019, we do not expect to elect that option. We are evaluating the impact of the Update on our consolidated financial statements. We expect the Update will result in an increase in the allowance for credit losses given the change to estimated losses over the contractual life adjusted for expected prepayments with an anticipated material impact from longer duration portfolios, as well as the addition of an allowance for debt securities. The amount of the increase will be impacted by the portfolio composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.


58

Current Accounting Developments ( continued )


Standard

Description

Effective date and financial statement impact

ASU 2016-02 – Leases (Topic 842)

The Update requires lessees to recognize leases on the balance sheet with lease liabilities and corresponding right-of-use assets based on the present value of lease payments. Lessor accounting activities are largely unchanged from existing lease accounting. The Update also eliminates leveraged lease accounting but allows existing leveraged leases to continue their current accounting until maturity, termination or modification.

We expect to adopt the guidance in first quarter 2019 using the modified retrospective method and practical expedients for transition. The practical expedients allow us to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees. We have started our implementation of the Update which has included an initial evaluation of our leasing contracts and activities. As a lessee we are developing our methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments (the December 31, 2017 future minimum lease payments were $6.6 billion). We do not expect a material change to the timing of expense recognition. Given the limited changes to lessor accounting, we do not expect material changes to recognition or measurement, but we are early in the implementation process and will continue to evaluate the impact. We are evaluating our existing disclosures and may need to provide additional information as a result of adoption of the Update.

In addition to the list above, the following Updates are applicable to us but are not expected to have a material impact on our consolidated financial statements:

ASU 2017-04 – Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment






Forward-Looking Statements

This document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make forward-looking statements in our other documents filed or furnished with the SEC, and our management may make forward-looking statements orally to analysts, investors, representatives of the media and others. Forward-looking statements can be identified by words such as "anticipates," "intends," "plans," "seeks," "believes," "estimates," "expects," "target," "projects," "outlook," "forecast," "will," "may," "could," "should," "can" and similar references to future periods. In particular, forward-looking statements include, but are not limited to, statements we make about: (i) the future operating or financial performance of the Company, including our outlook for future growth; (ii) our noninterest expense and efficiency ratio; (iii) future credit quality and performance, including our expectations regarding future loan losses and allowance levels; (iv) the appropriateness of the allowance for credit losses; (v) our expectations regarding net interest income and net interest margin; (vi) loan growth or the reduction or mitigation of risk in our loan portfolios; (vii) future capital or liquidity levels or targets and our estimated Common Equity Tier 1 ratio under Basel III capital standards; (viii) the performance of our mortgage business and any related exposures; (ix) the expected outcome and impact of legal, regulatory and legislative developments, as well as our expectations regarding compliance therewith; (x) future common stock dividends, common share repurchases and other uses of capital; (xi) our targeted range for return on assets, return on equity, and return on tangible common equity; (xii) the outcome of contingencies, such as legal proceedings; and (xiii) the Company's plans, objectives and strategies.

Forward-looking statements are not based on historical facts but instead represent our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in

circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:

current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates, U.S. fiscal debt, budget and tax matters (including the impact of the Tax Cuts & Jobs Act), geopolitical matters, and the overall slowdown in global economic growth;

our capital and liquidity requirements (including under regulatory capital standards, such as the Basel III capital standards) and our ability to generate capital internally or raise capital on favorable terms;

financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services;

the extent of our success in our loan modification efforts, as well as the effects of regulatory requirements or guidance regarding loan modifications;

the amount of mortgage loan repurchase demands that we receive and our ability to satisfy any such demands without having to repurchase loans related thereto or otherwise indemnify or reimburse third parties, and the credit quality of or losses on such repurchased mortgage loans;

negative effects relating to our mortgage servicing and foreclosure practices, as well as changes in industry standards or practices, regulatory or judicial requirements,


59


penalties or fines, increased servicing and other costs or obligations, including loan modification requirements, or delays or moratoriums on foreclosures;

our ability to realize our efficiency ratio target as part of our expense management initiatives, including as a result of business and economic cyclicality, seasonality, changes in our business composition and operating environment, growth in our businesses and/or acquisitions, and unexpected expenses relating to, among other things, litigation and regulatory matters;

the effect of the current low interest rate environment or changes in interest rates on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgages held for sale;

significant turbulence or a disruption in the capital or financial markets, which could result in, among other things, reduced investor demand for mortgage loans, a reduction in the availability of funding or increased funding costs, and declines in asset values and/or recognition of other-than-temporary impairment on securities held in our debt securities and equity securities portfolios;

the effect of a fall in stock market prices on our investment banking business and our fee income from our brokerage, asset and wealth management businesses;

negative effects from the retail banking sales practices matter and from other instances where customers may have experienced financial harm, including on our legal, operational and compliance costs, our ability to engage in certain business activities or offer certain products or services, our ability to keep and attract customers, our ability to attract and retain qualified team members, and our reputation;

resolution of regulatory matters, litigation, or other legal actions, which may result in, among other things, additional costs, fines, penalties, restrictions on our business activities, reputational harm, or other adverse consequences;

a failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers, including as a result of cyber attacks;

the effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin;

fiscal and monetary policies of the Federal Reserve Board; and

the other risk factors and uncertainties described under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017 .

In addition to the above factors, we also caution that the amount and timing of any future common stock dividends or repurchases will depend on the earnings, cash requirements and financial condition of the Company, market conditions, capital requirements (including under Basel capital standards), common stock issuance requirements, applicable law and regulations (including federal securities laws and federal banking regulations), and other factors deemed relevant by the Company's Board of Directors, and may be subject to regulatory approval or conditions.

For more information about factors that could cause actual results to differ materially from our expectations, refer to our reports filed with the Securities and Exchange Commission, including the discussion under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017 , as filed with the Securities and Exchange Commission and available on its website at www.sec.gov. 

Any forward-looking statement made by us speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.


Forward-looking Non-GAAP Financial Measures. From time to time management may discuss forward-looking non-GAAP financial measures, such as forward-looking estimates or targets for return on average tangible common equity. We are unable to provide a reconciliation of forward-looking non-GAAP financial measures to their most directly comparable GAAP financial measures because we are unable to provide, without unreasonable effort, a meaningful or accurate calculation or estimation of amounts that would be necessary for the reconciliation due to the complexity and inherent difficulty in forecasting and quantifying future amounts or when they may occur. Such unavailable information could be significant to future results.



60


Risk Factors

An investment in the Company involves risk, including the possibility that the value of the investment could fall substantially and that dividends or other distributions on the investment could be reduced or eliminated. For a discussion of risk factors that could adversely affect our financial results and condition, and the value of, and return on, an investment in the Company, we refer you to the "Risk Factors" section in our 2017 Form 10-K.


61


Controls and Procedures

Disclosure Controls and Procedures

The Company's management evaluated the effectiveness, as of March 31, 2018 , of the Company's disclosure controls and procedures. The Company's chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the Company's chief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2018 .


Internal Control Over Financial Reporting

Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP) and includes those policies and procedures that:

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during first quarter 2018 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.


62


Wells Fargo & Company and Subsidiaries

Consolidated Statement of Income (Unaudited)

Quarter ended March 31,

(in millions, except per share amounts)

2018


2017


Interest income

Debt securities (1)(2)

$

3,414


3,173


Mortgages held for sale (2)

179


182


Loans held for sale (1)

24


10


Loans

10,579


10,141


Equity securities (1)

231


175


Other interest income (1)

920


532


Total interest income (2)

15,347


14,213


Interest expense

Deposits (2)

1,090


536


Short-term borrowings

311


114


Long-term debt (2)

1,576


1,147


Other interest expense

132


92


Total interest expense (2)

3,109


1,889


Net interest income (2)

12,238



12,324


Provision for credit losses

191


605


Net interest income after provision for credit losses

12,047


11,719


Noninterest income

Service charges on deposit accounts

1,173


1,313


Trust and investment fees

3,683


3,570


Card fees

908


945


Other fees

800


865


Mortgage banking

934


1,228


Insurance

114


277


Net gains from trading activities (1)

243


272


Net gains on debt securities (3)

1


36


Net gains from equity securities (1)(4)

783


570


Lease income

455


481


Other (2)

602


374


Total noninterest income (2)

9,696


9,931


Noninterest expense

Salaries

4,363


4,261


Commission and incentive compensation

2,768


2,725


Employee benefits

1,598


1,686


Equipment

617


577


Net occupancy

713


712


Core deposit and other intangibles

265


289


FDIC and other deposit assessments

324


333


Other

4,394


3,209


Total noninterest expense

15,042


13,792


Income before income tax expense (2)

6,701



7,858


Income tax expense (2)

1,374


2,133


Net income before noncontrolling interests (2)

5,327



5,725


Less: Net income from noncontrolling interests

191


91


Wells Fargo net income (2)

$

5,136



5,634


Less: Preferred stock dividends and other

403


401


Wells Fargo net income applicable to common stock (2)

$

4,733


5,233


Per share information

Earnings per common share (2)

$

0.97


1.05


Diluted earnings per common share (2)

0.96


1.03


Dividends declared per common share

0.39


0.38


Average common shares outstanding

4,885.7


5,008.6


Diluted average common shares outstanding

4,930.7


5,070.4


(1)

Financial information for the prior period has been revised to reflect the impact of the adoption of Accounting Standards Update (ASU) 2016-01 Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . See Note 1 (Summary of Significant Accounting Policies) for more information.

(2)

Financial information for the prior period has been revised to reflect the impact of the adoption of ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, effective January 1, 2017.

(3)

Total other-than-temporary impairment (OTTI) losses were $17 million and $43 million for first quarter 2018 and 2017 , respectively. Of total OTTI, losses of $10 million and $52 million were recognized in earnings, and losses (reversal of losses) of $7 million and $(9) million were recognized as non-credit-related OTTI in other comprehensive income for first quarter 2018 and 2017 , respectively.

(4)

Includes OTTI losses of $20 million and $77 million for first quarter 2018 and 2017 , respectively.


The accompanying notes are an integral part of these statements.


63


Wells Fargo & Company and Subsidiaries

Consolidated Statement of Comprehensive Income (Unaudited)

Quarter ended March 31,

(in millions)

2018


2017


Wells Fargo net income (2)

$

5,136


5,634


Other comprehensive income (loss), before tax:

Debt securities (1):

Net unrealized gains (losses) arising during the period

(3,443

)

369


Reclassification of net (gains) losses to net income

68


(145

)

Derivatives and hedging activities:

Net unrealized losses arising during the period (2)

(242

)

(362

)

Reclassification of net (gains) losses to net income

60


(202

)

Defined benefit plans adjustments:

Net actuarial and prior service gains (losses) arising during the period

6


(7

)

Amortization of net actuarial loss, settlements and other to net income

32


38


Foreign currency translation adjustments:

Net unrealized gains (losses) arising during the period

(2

)

16


Other comprehensive loss, before tax (2)

(3,521

)

(293

)

Income tax benefit related to other comprehensive income (2)

862


123


Other comprehensive loss, net of tax (2)

(2,659

)

(170

)

Less: Other comprehensive income from noncontrolling interests (2)

-


14


Wells Fargo other comprehensive loss, net of tax (2)

(2,659

)

(184

)

Wells Fargo comprehensive income (2)

2,477


5,450


Comprehensive income from noncontrolling interests

191


105


Total comprehensive income (2)

$

2,668


5,555


(1)

Per the adoption of ASU 2016-01, the quarter ended March 31, 2018, reflects only net unrealized gains and reclassification of net gains to net income from debt securities. The quarter ended March 31, 2017, includes net unrealized gains from equity securities of $61 million and reclassification of gains to net income related to equity securities of $(116) million .

(2)

Financial information for the prior period has been revised to reflect the impact of the adoption of ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, effective January 1, 2017.


The accompanying notes are an integral part of these statements.


64


Wells Fargo & Company and Subsidiaries

Consolidated Balance Sheet

(in millions, except shares)

Mar 31,
2018


Dec 31,
2017


Assets

(Unaudited)


Cash and due from banks

$

18,145


23,367


Interest-earning deposits with banks (1)

184,250


192,580


Total cash, cash equivalents, and restricted cash (1)

202,395


215,947


Federal funds sold and securities purchased under resale agreements (1)

73,550


80,025


Debt securities:

Trading, at fair value (2)

59,866


57,624


Available-for-sale, at fair value (2)

271,656


276,407


Held-to-maturity, at cost (fair value $138,323 and $138,985)

141,446


139,335


Mortgages held for sale (includes $13,859 and $16,116 carried at fair value) (3)

17,944


20,070


Loans held for sale (includes $1,695 and $1,023 carried at fair value) (2)

3,581


1,131


Loans (includes $352 and $376 carried at fair value) (3)

947,308


956,770


Allowance for loan losses 

(10,373

)

(11,004

)

Net loans

936,935


945,766


Mortgage servicing rights: 

Measured at fair value 

15,041


13,625


Amortized 

1,411


1,424


Premises and equipment, net 

8,828


8,847


Goodwill 

26,445


26,587


Derivative assets

11,467


12,228


Equity securities (includes $35,561 and $39,227 carried at fair value) (2)

58,935


62,497


Other assets (2)

85,888


90,244


Total assets (4) 

$

1,915,388


1,951,757


Liabilities

Noninterest-bearing deposits 

$

370,085


373,722


Interest-bearing deposits 

933,604


962,269


Total deposits 

1,303,689


1,335,991


Short-term borrowings 

97,207


103,256


Derivative liabilities

7,883


8,796


Accrued expenses and other liabilities

73,397


70,615


Long-term debt 

227,302


225,020


Total liabilities (5) 

1,709,478


1,743,678


Equity 

Wells Fargo stockholders' equity: 

Preferred stock 

26,227


25,358


Common stock – $1-2/3 par value, authorized 9,000,000,000 shares; issued 5,481,811,474 shares 

9,136


9,136


Additional paid-in capital 

60,399


60,893


Retained earnings 

147,928


145,263


 Cumulative other comprehensive income (loss)

(4,921

)

(2,144

)

Treasury stock – 607,928,993 shares and 590,194,846 shares 

(31,246

)

(29,892

)

Unearned ESOP shares 

(2,571

)

(1,678

)

Total Wells Fargo stockholders' equity 

204,952


206,936


Noncontrolling interests 

958


1,143


Total equity 

205,910


208,079


Total liabilities and equity

$

1,915,388


1,951,757


(1)

Financial information has been revised to reflect the impact of the adoption of ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash in which we changed the presentation of our cash and cash equivalents to include both cash and due from banks as well as interest-earning deposits with banks, which are inclusive of any restricted cash. See Note 1 (Summary of Significant Accounting Policies) for more information.

(2)

Financial information for the prior period has been revised to reflect the impact of the adoption of ASU 2016-01 Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . See Note 1 (Summary of Significant Accounting Policies) for more information.

(3)

Parenthetical amounts represent assets and liabilities for which we are required to carry at fair value or have elected the fair value option.

(4)

Our consolidated assets at March 31, 2018 , and December 31, 2017 , include the following assets of certain variable interest entities (VIEs) that can only be used to settle the liabilities of those VIEs: Cash and due from banks, $111 million and $116 million ; Interest-earning deposits with banks, $8 million and $371 million ; Debt securities, $0 million at both period ends; Net loans, $13.0 billion and $12.5 billion ; Derivative assets, $0 million at both period ends; Equity securities, $28 million and $306 million ; Other assets, $230 million and $342 million ; and Total assets, $13.4 billion and $13.6 billion , respectively.

(5)

Our consolidated liabilities at March 31, 2018 , and December 31, 2017 , include the following VIE liabilities for which the VIE creditors do not have recourse to Wells Fargo: Derivative liabilities, $4 million and $5 million ; Accrued expenses and other liabilities, $127 million and $132 million ; Long-term debt, $947 million and $1.5 billion ; and Total liabilities, $1.1 billion and $1.6 billion , respectively.


The accompanying notes are an integral part of these statements.


65



Wells Fargo & Company and Subsidiaries

Consolidated Statement of Changes in Equity (Unaudited)

Preferred stock

Common stock

(in millions, except shares)

Shares


Amount


Shares


Amount


Balance December 31, 2016

11,532,712


$

24,551


5,016,109,326


$

9,136


Cumulative effect from change in hedge accounting (1)

Balance January 1, 2017

11,532,712


$

24,551


5,016,109,326


$

9,136


Net income

Other comprehensive income (loss), net of tax

Noncontrolling interests

Common stock issued

33,699,497


Common stock repurchased

(53,074,224

)

Preferred stock issued to ESOP

950,000


950


Preferred stock released by ESOP

Preferred stock converted to common shares

-


-


-


Common stock warrants repurchased/exercised

Preferred stock issued

-


-


Common stock dividends

Preferred stock dividends

Stock incentive compensation expense

Net change in deferred compensation and related plans

Net change

950,000



950



(19,374,727

)


-


Balance March 31, 2017

12,482,712



$

25,501



4,996,734,599



$

9,136


Balance December 31, 2017

11,677,235


$

25,358


4,891,616,628


$

9,136


Cumulative effect from change in accounting policies (2)

Balance January 1, 2018

11,677,235


$

25,358


4,891,616,628


$

9,136


Net income

Other comprehensive income (loss), net of tax

Noncontrolling interests

Common stock issued

28,425,759


Common stock repurchased

(50,567,457

)

Preferred stock issued to ESOP

1,100,000


1,100


Preferred stock released by ESOP

Preferred stock converted to common shares

(231,000

)

(231

)

4,407,551


Common stock warrants repurchased/exercised

Preferred stock issued





Common stock dividends

Preferred stock dividends

Stock incentive compensation expense

Net change in deferred compensation and related plans

Net change

869,000



869



(17,734,147

)


-


Balance March 31, 2018

12,546,235



$

26,227



4,873,882,481



$

9,136


(1)

Effective January 1, 2017, we adopted changes in hedge accounting pursuant to ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities .

(2)

Effective January 1, 2018, we adopted ASU 2016-04 – Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products, ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities , and ASU 2014-09 – Revenue from Contracts With Customers (Topic 606) and subsequent related Updates. See Note 1 (Summary of Significant Accounting Policies) in this Report for more information.

The accompanying notes are an integral part of these statements.



66



Wells Fargo stockholders' equity

Additional

paid-in

capital


Retained

earnings


Cumulative

other

comprehensive

income


Treasury

stock


Unearned

ESOP

shares


Total

Wells Fargo

stockholders'

equity


Noncontrolling

interests


Total

equity


60,234


133,075


(3,137

)

(22,713

)

(1,565

)

199,581


916


200,497


(381

)

168


(213

)



(213

)

60,234


132,694


(2,969

)

(22,713

)

(1,565

)

199,368


916


200,284


5,634


5,634


91


5,725


(184

)

(184

)

14


(170

)

2


2


(32

)

(30

)

3


(184

)

1,587


1,406


1,406


750


(2,925

)

(2,175

)

(2,175

)

31


(981

)

-


-


-


-


-


-


-


-


-


-


(44

)

(44

)

(44

)

-


-


-


12


(1,915

)

(1,903

)

(1,903

)

(401

)

(401

)

(401

)

389


389


389


(792

)

21


(771

)

(771

)

351



3,134



(184

)


(1,317

)


(981

)


1,953



73



2,026


60,585



135,828



(3,153

)


(24,030

)


(2,546

)


201,321



989



202,310


60,893


145,263


(2,144

)

(29,892

)

(1,678

)

206,936


1,143


208,079


94


(118

)

(24

)

(24

)

60,893


145,357


(2,262

)

(29,892

)

(1,678

)

206,912


1,143


208,055


5,136


5,136


191


5,327


(2,659

)

(2,659

)



(2,659

)

7


7


(376

)

(369

)

25


(231

)

1,414


1,208


1,208


-


(3,029

)

(3,029

)

(3,029

)

43


(1,143

)

-


-


(19

)

250


231


231


5


226


-


-


(157

)

(157

)

(157

)



-


-


13


(1,924

)

(1,911

)

(1,911

)

(410

)

(410

)

(410

)

437


437


437


(848

)

35


(813

)

(813

)

(494

)


2,571



(2,659

)


(1,354

)


(893

)


(1,960

)


(185

)


(2,145

)

60,399



147,928



(4,921

)


(31,246

)


(2,571

)


204,952



958



205,910




67



Wells Fargo & Company and Subsidiaries

Consolidated Statement of Cash Flows (Unaudited)

Quarter ended March 31,

(in millions)

2018


2017


Cash flows from operating activities:

Net income before noncontrolling interests (2)

$

5,327


5,725


Adjustments to reconcile net income to net cash provided by operating activities:

Provision for credit losses

191


605


Changes in fair value of MSRs, MHFS and LHFS carried at fair value

(788

)

8


Depreciation, amortization and accretion

1,431


1,237


Other net (gains) (1)(2)

(2,309

)

(1,158

)

Stock-based compensation

792


740


Originations and purchases of mortgages held for sale (1)

(38,460

)

(37,664

)

Proceeds from sales of and paydowns on mortgages held for sale (1)

31,236


25,269


Net change in:

Debt and equity securities, held for trading (1)

10,861


14,628


Loans held for sale (1)

(602

)

202


Deferred income taxes

484


1,007


Derivative assets and liabilities (2)

(20

)

(709

)

Other assets (2)

3,331


3,618


Other accrued expenses and liabilities (2)

3,756


(370

)

Net cash provided by operating activities

15,230


13,138


Cash flows from investing activities:

Net change in:

Federal funds sold and securities purchased under resale agreements (3)

4,566


(12,395

)

Available-for-sale debt securities:

Proceeds from sales (1)

3,458


3,023


Prepayments and maturities

6,909


11,016


Purchases

(14,179

)

(14,495

)

Held-to-maturity debt securities:

Paydowns and maturities

2,304


1,470


Equity securities, not held for trading:

Proceeds from sales and capital returns (1)

1,920


1,533


Purchases (1)

(1,234

)

(698

)

Loans:

Loans originated by banking subsidiaries, net of principal collected (4)

1,238


5,123


Proceeds from sales (including participations) of loans held for investment

3,803


2,504


Purchases (including participations) of loans

(268

)

(1,148

)

Principal collected on nonbank entities' loans (4)

2,210


2,788


Loans originated by nonbank entities (4)

(1,655

)

(1,927

)

Net cash paid for acquisitions

-


(46

)

Proceeds from sales of foreclosed assets and short sales

935


1,519


Other, net

154


(166

)

Net cash provided (used) by investing activities

10,161


(1,899

)

Cash flows from financing activities:

Net change in:

Deposits

(32,276

)

19,365


Short-term borrowings

(5,165

)

(1,064

)

Long-term debt:

Proceeds from issuance

15,517


12,975


Repayment

(11,625

)

(11,937

)

Preferred stock:

Cash dividends paid

(418

)

(408

)

Common stock:

Proceeds from issuance

382


572


Stock tendered for payment of withholding taxes

(307

)

(359

)

Repurchased

(3,029

)

(2,175

)

Cash dividends paid

(1,867

)

(1,859

)

Net change in noncontrolling interests

(113

)

(30

)

Other, net

(42

)

(29

)

Net cash provided (used) by financing activities

(38,943

)

15,051


Net change in cash, cash equivalents, and restricted cash (3)

(13,552

)

26,290


Cash, cash equivalents, and restricted cash at beginning of period (3)

215,947


221,043


Cash, cash equivalents, and restricted cash at end of period (3)

$

202,395


247,333


Supplemental cash flow disclosures:

Cash paid for interest

$

3,002


1,612


Cash paid for income taxes

158


215


(1)

Financial information for the prior period has been revised to reflect the impact of the adoption of ASU 2016-01 Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . See Note 1 (Summary of Significant Accounting Policies) for more information.

(2)

Financial information for the prior period has been revised to reflect the impact of the adoption of ASU 2017-12 – Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, effective January 1, 2017.

(3)

Financial information has been revised to reflect the impact of the adoption of ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash in which we changed the presentation of our cash and cash equivalents to include both cash and due from banks as well as interest-earning deposits with banks, which are inclusive of any restricted cash. See Note 1 (Summary of Significant Accounting Policies) for more information.

(4)

Prior periods have been revised to reflect classification changes due to entity restructuring activities.

The accompanying notes are an integral part of these statements. See Note 1 (Summary of Significant Accounting Policies) for noncash activities.


68

Note 1: Summary of Significant Accounting Policies ( continued )


See the Glossary of Acronyms at the end of this Report for terms used throughout the Financial Statements and related Notes.

Note 1:

 Summary of Significant Accounting Policies

Wells Fargo & Company is a diversified financial services company. We provide banking, trust and investments, mortgage banking, investment banking, retail banking, brokerage, and consumer and commercial finance through banking locations, the internet and other distribution channels to consumers, businesses and institutions in all 50 states, the District of Columbia, and in foreign countries. When we refer to "Wells Fargo," "the Company," "we," "our" or "us," we mean Wells Fargo & Company and Subsidiaries (consolidated). Wells Fargo & Company (the Parent) is a financial holding company and a bank holding company. We also hold a majority interest in a real estate investment trust, which has publicly traded preferred stock outstanding.

Our accounting and reporting policies conform with U.S. generally accepted accounting principles (GAAP) and practices in the financial services industry. For discussion of our significant accounting policies, see Note 1 (Summary of Significant Accounting Policies) in our Annual Report on Form 10-K for the year ended December 31, 2017 ( 2017 Form 10-K). To prepare the financial statements in conformity with GAAP, management must make estimates based on assumptions about future economic and market conditions (for example, unemployment, market liquidity, real estate prices, etc.) that affect the reported amounts of assets and liabilities at the date of the financial statements, income and expenses during the reporting period and the related disclosures. Although our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual conditions could be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Management has made significant estimates in several areas, including:

allowance for credit losses (Note 6 (Loans and Allowance for Credit Losses));

valuations of residential mortgage servicing rights (MSRs) (Note 9 (Securitizations and Variable Interest Entities) and Note 10 (Mortgage Banking Activities)) and financial instruments (Note 15 (Fair Values of Assets and Liabilities));

liabilities for contingent litigation losses (Note 13 (Legal Actions)); and

income taxes.


Actual results could differ from those estimates.

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our 2017 Form 10-K.

Accounting Standards Adopted in 2018

In first quarter 2018 , we adopted the following new accounting guidance:

Accounting Standards Update (ASU or Update) 2017-09 – Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting;

ASU 2017-07 – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost;

ASU 2017-05 – Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets;

ASU 2017-01 – Business Combinations (Topic 805): Clarifying the Definition of a Business;

ASU 2016-18 – Statement of Cash Flows (Topic 230): Restricted Cash;

ASU 2016-16 – Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory;

ASU 2016-15 – Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments;

ASU 2016-04 – Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products;

ASU 2016-01 – Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities; and

ASU 2014-09 – Revenue from Contracts With Customers (Topic 606) and subsequent related Updates.


ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the ASU, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The Update is applied to awards modified on or after the adoption date and accordingly, did not have a material impact on our consolidated financial statements.


ASU 2017-07 requires that the service cost component of net benefit cost be reported in the same line item as other compensation costs arising from services rendered by employees during the period, and the other pension cost components (interest cost, expected return on plan assets and amortization of actuarial gains and losses) be presented in the income statement separate from the service cost component. The income statement line item used to present the other pension cost components must be disclosed. We adopted this change in first quarter 2018. The Update did not have a material impact on our consolidated financial statements.


ASU 2017-05 provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The ASU applies to nonfinancial assets, including real estate (e.g., buildings, land, windmills, solar farms), ships and intellectual property. We adopted this change in first quarter 2018. The Update did not have a material impact on our consolidated financial statements.


ASU 2017-01 requires that when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business. The Update is applied prospectively and accordingly, did not have a material impact on our consolidated financial statements.